Top Risks For The Mario Chakar Global Insurance Industry ......Weak technicalresults An industry where technical performance, typically measured by combined ratios (non-life) and return

Nov. 17, 2020

Mario ChakarAssociateInsurance Ratings

Top Risks For The Global Insurance IndustryCould COVID-19’s second wave shake up the sector?

Contents

2

Key Takeaways 3

Risk Categories 5

Developed EMEA Key Risks 7

Developing EMEA Key Risks 13

Asia-Pacific Key Risks 19

North America Key Risks 25

Latin America Key Risks 31

Analytical Contacts 37

Key Takeaways

– The impact of COVID-19 on global insurance markets is largely felt through asset risks, notably capital markets volatility, and weaker premium growth prospects.

– We expect most COVID-19-related losses (business interruption, event cancellation, etc.) to be picked up by reinsurers, so primary insurers' technical performance is unlikely to deteriorate materially.

– Strict lockdown measures helped maintain satisfactory performance, as motor and medical claims had a positive impact on loss ratios.

– Developed markets, particularly life ones, are likely to shrink in real terms as a result of the economic slowdown.

– Developing markets, through their riskier asset allocation, will likely experience more declines in return on equity than developed markets.

– Ultralow interest rates mean that the most significant source of risk to insurers is the performance of investments, especially life insurers with guaranteed back books.

3

Insurance | Relative Resilience, Risks Remain

4

– Insurance downgrades this year have been almost exclusively linked to sovereign rating changes.

– Outlook changes occurred for issuerswith thinner capital buffers and those most impacted by financial market volatility.

– We expect insurance ratings to continue to show resilience, but risks remain from: investment portfolio exposure, business lines most acutely affected by the pandemic, wider pressures on investment returns, low interest rate, and lower economic growth.

– Since second-quarter 2020, the following sectors have carried negative sector outlooks: U.S., Canada, Australian mortgage insurance, global reinsurance, APAC life, and Latin America.C&G--Corporates & Governments. EMEA--Europe, the Middle East, and Africa.

Source: S&P Global Ratings.

2020 Insurance Rating Actions In Context: For Insurance Capital, Quantity And Quality Matter

5040

% of ratings

3020100

Latin America

Asia-Pacific

North America

EMEA

Global Insurance

Global C&G

Downgrade Outlook revisionCreditWatch placement

Top Risks For The Global Insurance Sectors

5

Risk Category Description

Investment performance risk Capturing financial markets risks, including interest rates, mark to market, and asset quality.

Exposure to high-risk assets High-risk assets typically include equities (listed and unlisted), real estate, fixed-income investments or deposits in institutions that are rated 'BB+' or lower, and unrated bonds and loans.

Country risk Risk factor taking into account considerations such as macroeconomic risk, sovereign rating limitations, geopolitical, and rule of law risks.

Intense competitive environment Whether the market is concentrated with a few players or contains a high number of smaller ones, an intense competitive environment could lead to price wars and hurt profitability.

Muted market growth prospects The lack of potential for premium growth in a market, either because it is mature or due to adverse macroeconomic conditions, with high inflation resulting in near-zero (or negative) real growth.

Weak technical results An industry where technical performance, typically measured by combined ratios (non-life) and return on assets (life) is loss-making.

Exposure to natural catastrophes Markets with material exposure to climate risk, notably, earthquakes, hurricanes, and other natural disasters.

Litigious legal system A sector where litigation often leads to lengthy court cases, increasing the tail of an insurer's liabilities, and consequently, resulting in unpredictable claims settlements.

Government and regulatory policyrisks

Markets exposed to changes in government or regulatory policies, often resulting in material impacts on insurers' business models and/or profitability.

Foreign exchange impact Reflects the impact foreign exchange risks could have on profitability.

Other Risk classification that does not fit any of the 10 categories described above.

Key Risks

Developed EMEA Property/Casualty Insurance

7


German-speaking–Austria–Germany–Switzerland

Nordic–Denmark–Finland–Norway–Sweden

Northern Europe–Belgium–France–Ireland–Netherlands–U.K.

Southern Europe–Italy–Portugal–Spain

Developed EMEA P/C | Investment Performance Is A Major Risk

8

– To a lesser extent than life insurers, the low interest rate environment will likely impact investment yields for P/C insurers, and consequently ROE.

– Insurers (particularly Nordics) have increased investment leverage to enhance returns through higher-risk assets, mainly equities.

– The intense competitive environment translates into weaker technical earnings, particularly on motor and medical lines in the U.K. and Ireland.

– Changes in government and regulatory policies historically resulted in profit volatility, notably in the U.K. and Ireland (for example, the discount rate in the U.K. used in settling bodily injury claims). The countries' litigious legal system has also increased product risk, and consequently unpredictable claims settlements.

– Exposure to natural catastrophes is mainly limited to flooding and weather events such as hailstorms, windstorms, and torrential rain. Their impact has generally been manageable.


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Investment performance risk Intense competitive environment Exposure to high risk assets Exposure to natural catastrophes

Government and regulatory policy risks Country risk Litigious legal system Foreign exchange impact

Weak technical results Other

Relatively Stable Combined Ratios Capital Markets Volatility To Impact Nordic ROE, The Result of Insurers' Risky Asset Mix

Developed EMEA P/C | Performance Metrics

9

South Europe's Economic Performance Going Into COVID-19 Gives It Solid Push For GWP Growth

f--Forecast. ROE—Return on equity. Source: S&P Global Ratings.

87.5%

90.0%

92.5%

95.0%

97.5%

100.0%

2018 2019 2020f 2021f

German-speaking Nordic Northern Europe Southern Europe

0%

4%

8%

12%

16%

2018 2019 2020f 2021f


(1%)

0%

1%

2%

3%

4%

2018 2019 2020f 2021f


Developed EMEA Life

10


German-speaking–Austria–Germany–Switzerland

Nordic–Denmark–Finland–Norway–Sweden

Northern Europe–Belgium–France–Netherlands–U.K.

Southern Europe–Italy–Portugal–Spain

Developed EMEA Life | Low Interest Rate Risk Is Pronounced

11

– We assess investment performance risk as a key driver of industry risks.

– The ultra low interest rate environment will continue to weigh on life insurers' profitability (ROA and ROE), particularly those with guaranteed products. This is especially relevant for insurers in the German-speaking and Nordic regions.

– In search of higher investment yields, some markets are exposed to the volatile equity and real estate classes. These high-risk assets result in ROE volatility.

– The subdued macroeconomic environment weighs on growth prospects, where we expect real premium growth to remain flat at best in 2020-2021.

– Despite competitive market dynamics, most markets are dominated by a few large players that share the market's premiums and profits.


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Investment performance risk Country risk Exposure to high risk assets Government and regulatory policy risks

Intense competitive environment Muted market growth prospects Exposure to natural catastrophes Foreign exchange impact

Weak technical results Other

Conservative Investment Portfolio Limits ROA Volatility Outside The Nordic Region

Capital Markets Volatility To Impact Nordic ROE In 2020

Developed EMEA Life | Performance Metrics

12

Real Premium Growth To Remain Flat At Best

f--Forecast. ROA--Return on assets. ROE--Return on equity. Source: S&P Global Ratings.

(4%)

0%

4%

8%

12%

16%

2018 2019 2020f 2021f


(10%)

(5%)

0%

5%

10%

2018 2019 2020f 2021f


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2018 2019 2020f 2021f


Developing EMEA Property/Casualty

13


Group 1–Bahrain–Jordan–Kuwait–Qatar–Saudi Arabia–United Arab Emirates

Group 2–Czech Republic–Israel–Poland–Slovenia

Group 3–Azerbaijan–Kazakhstan–Russia–South Africa–Turkey

Group 4–Angola–Kenya–Morocco

Developing EMEA P/C | Macroeconomic And Geopolitical Risks Prevalent

14


– Country risk, particularly sovereign rating caps and geopolitical risk, is pronounced for many of EMEA’s developing sectors, notably in the Middle East and North Africa.

– Foreign exchange risk results currency devaluation in non-pegged regimes, which increases the cost of claims for the dominant motor and medical lines. This is particularly the case in Turkey, South Africa, and Angola.

– Low market growth prospects in the absence of new mandatory covers increases competitive pressures, which often results in poor technical performance.

– Exposure to high-risk assets (equities and real estate) results in earnings volatility.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Country risk Investment performance risk Intense competitive environment Muted market growth prospects

Foreign exchange impact Weak technical results Exposure to high-risk assets Government and regulatory policy risks

Exposure to natural catastrophes Other

Combined Ratios Feel Little Impact From COVID-19 As Russia/CIS Drives Deterioration In Group 3

ROE Likely To Take A Hit From Equity Volatility, Lower Interest Rates, And Lower Oil Prices

Developing EMEA P/C | Performance Metrics

15

Real GWP Growth Materially Impacted in CEE By The Economic Downturn, But Will Rebound

AOA--Angolan kwanza. CEE--Central and Eastern European countries. f--Forecast. ROA--Return on assets. ROE--Return on equity. TRY--Turkish new lira. USD--U.S. dollar. RUB--Russian ruble. ZAR--South African rand. Source: S&P Global Ratings.

Currency Devaluation Increases Claims Costs

90%

94%

98%

102%

106%

2018 2019 2020f 2021f

Group 1 Group 2 Group 3 Group 4

0%

5%

10%

15%

20%

25%

30%

2018 2019 2020f 2021f


(8%)

(4%)

0%

4%

8%

2018 2019 2020f 2021f


(80%)

(60%)

(40%)

(20%)

0%

20%

40%

Oct-17 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19 Apr-20 Sep-20

USD per AOA USD per TRY USD per ZAR USD per RUB

Developing EMEA Life

16


Developing EMEA Life | Weak Macroeconomic Conditions Impede Growth Potential

17


– In EMEA's developing markets, insurance sectors have little in common, but country risks and government and regulatory risks are more prevalent than in developed markets.

– Prolonged periods of weak economic conditions, muted growth prospects, together with low levels of wealth, have led to increased lapse rates, particularly as policyholders find themselves with less disposable income.

– The low interest rate environment and volatility in capital markets are factors weighing on profitability.

– Litigation risk on certain unit-linked policies in Czech Republic and Poland.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Country risk Investment performance risk Muted market growth prospects Government and regulatory policy risks Foreign exchange impact Litigious legal system Other

2020 ROA Supported By Bounce In Israel After A One-Off Reserve Strengthening in 2019 ROE To Remain Relatively Unaffected

Developing EMEA Life | Performance Metrics

18

Real Premium Growth Remains Albeit Below Historic Levels

f--Forecast. ROA--Return on assets. ROE--Return on equity. Source: S&P Global Ratings.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2018 2019 2020f 2021f10%

11%

12%

13%

14%

15%

2018 2019 2020f 2021f

0%

2%

4%

6%

8%

10%

12%

14%

2018 2019 2020f 2021f

APAC Property/Casualty

19


Developed–Australia–Hong Kong–Japan–Korea–New Zealand–Singapore

Developing–China–Malaysia–Taiwan–Thailand

APAC P/C | Fierce Competition Amid Low Growth And Exposure To Natural Catastrophes

20


– Mature and saturated markets, with some segments producing reasonable returns, resulting in increased competition.

– Exposure to natural catastrophes, notably tsunamis, earthquakes (Japan and New Zealand), and flooding (Taiwan and Thailand). We also note an increase in frequency of cat events, such as in Australia and New Zealand.

– Excessive risk-taking in the investment portfolio, mainly through domestic and foreign equity investments. This leads to earnings volatility.

– Rising compliance costs and government policy changes (Hong Kong and Malaysia) make the operating environment uncertain.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Intense competitive environment Muted market growth prospects Exposure to natural catastrophes Investment performance risk

Weak technical results Exposure to high-risk assets Government and regulatory policy risks

Combined Ratios To Remain Relatively StableDeterioration In ROE, Particularly In Developing Markets Unlikely To Bounce Back Materially

APAC P/C | Performance Metrics

21

No Material Impact On Real Premium Growth In Developing Markets As A Result Of The Pandemic

f--Forecast. ROA—Return on assets. ROE—Return on equity. Source: S&P Global Ratings.

96%

98%

100%

102%

2018 2019 2020f 2021f

Developed Developing

4%

5%

6%

7%

8%

9%

10%

11%

2018 2019 2020f 2021f


0%

2%

4%

6%

8%

10%

2018 2019 2020f 2021f

Group 1 Group 2

APAC Life

22


Developed–Australia–Hong Kong–Japan–Korea–New Zealand–Singapore

Developing–China–Malaysia–Taiwan–Thailand

APAC Life | Low Interest Rates Are The Source Of Weak Underwriting Profits

23


– The low interest rate environment and volatility in financial markets mean that investment returns are unlikely to be a major offsetting factor to improve ROA and ROE.

– Legacy high-yield guaranteed policies and structural duration mismatch cause material ALM risk, which leads to weak technical results.

– Life insurance technical results have been dampened by weaker-than-expected experience across disability lines.

– The economic slowdown caused by COVID-19 means that premium growth will be subdued in 2020, with developed markets likely to shrink materially in real terms.

– Increased regulatory scrutiny in relation to sales and distribution, notably in Australia and New Zealand.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Investment performance risk Weak technical results Muted market growth prospects Intense competitive environment

Government and regulatory policy risks Exposure to high-risk assets Foreign exchange impact Other

Developing Markets' ROA Unlikely To Recover To Pre-Pandemic Levels in 2021

Developing Markets' Riskier Assets to Generate Higher ROE Than Developed Markets

APAC Life | Performance Metrics

24

Developed Markets To Shrink While China Continues To Drive Growth in Developing APAC


0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

2018 2019 2020f 2021f


4%

6%

8%

10%

12%

14%

16%

2018 2019 2020f 2021f


(10%)

(5%)

0%

5%

10%

15%

2018 2019 2020f 2021f


North America Property/Casualty

25


North America P/C | Catastrophe Risk And Litigious Claims Increase Claims Severity

26


– The weaker investment environment, namely due to low interest rates and volatile equity markets, will continue to suppress investment performance.

– Macroeconomic pressures will continue to weigh on the market's growth prospects.

– The U.S.'s legal system is generally litigious, resulting in unpredictable claims settlements and related reserve volatility arising from unanticipated spikes in claims severity or frequency trends than in most other markets.

– Material exposure to natural perils, especially hurricanes, tornados, and wildfires, the latter becoming more prevalent in recent years. These losses tend to be borne by insurers as exposures are within retention levels.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Exposure to natural catastrophes Investment performance risk Litigious legal system Muted market growth prospects

Net Combined Ratios Not Materially Impacted By COVID-19 Some Dip In ROE From Financial Market Volatility

North America P/C | Performance Metrics

27

Drop In Real Premium Growth, Particularly The U.S., Before A Rebound In 2021


96%

97%

98%

99%

100%

101%

2018 2019 2020f 2021f

Canada U.S.

Source: S&P Global Ratings. f--Forecast.Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.

0%

2%

4%

6%

8%

10%

2018 2019 2020f 2021f

Canada U.S.


(6%)

(4%)

(2%)

0%

2%

4%

2018 2019 2020f 2021f

Canada U.S.


North America Life

28


North America Life | Weak Macroeconomic Conditions Amid Rising Counterparty Credit Risk

29


– Ultralow interest rates, which we expect will remain for longer, coupled with guaranteed policies,give rise to weak technical performance.

– Macroeconomic risk, namely weak economic growth and higher unemployment in the developed U.S. and Canadian markets, make for a difficult operating environment.

– Financial market risk arising from increased credit risk in corporate bonds, together with significant losses in equity markets.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Investment performance risk Weak technical results Country risk

Low Interest Rates Coupled With High Guarantees To Impact ROA

Equity Market Losses To Depress ROE In 2020 Before A Considerable Rebound In 2021

North America Life | Performance Metrics

30

Sharp Decline In Real Premium Growth In 2020 To Recover In 2021


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2018 2019 2020f 2021f

Canada U.S.


4%

5%

6%

7%

8%

9%

10%

11%

2018 2019 2020f 2021f

Canada U.S.


(10%)

(5%)

0%

5%

10%

2018 2019 2020f 2021f

Canada U.S.


Latin America Property/Casualty

31


Latin America P/C | Macroeconomic And Political Instability Hinder Growth Prospects

32


– Weak technical results due to a high cost base and aggressive competition, with insurers relying on investment returns to produce overall net profits.

– Exposure to currency devaluation, particularly on the largest lines of business (motor and medical).

– The economic downturn caused by COVID-19 will have an adverse effect on potential premium growth for the sectors.

– A history of sovereign defaults, notably in Argentina, exposes insurers' credit quality. Unstable political environments also pose a drag on insurance sectors.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Country risk Muted market growth prospects Investment performance risk Weak technical results Forex impact

Some Deterioration In Combined Ratios, Partly Reflecting Foreign Exchange Movements

Adverse Currency Movements And Lockdown Measures To Impact ROE

Latin America P/C | Performance Metrics

33

Markets To Shrink In Real Terms In 2020 Before A Strong Rebound In 2021 Currency Devaluation Increases Claims Costs

(80%)

(60%)

(40%)

(20%)

0%

20%

Oct-17 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19 Apr-20 Sep-20

USD per ARS USD per BRL USD per COP USD per MXN

ARS--Argentine peso. BRL--Brazilian real. COP--Colombian peso. f--Forecast. MXN--Mexican peso. ROA--Return on assets. ROE--Return on equity. USD--U.S. dollar. Source: S&P Global Ratings.

97%

98%

99%

100%

101%

102%

2018 2019 2020f 2021f10%

11%

12%

13%

14%

15%

2018 2019 2020f 2021f

(5%)

(4%)

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

2018 2019 2020f 2021f

Latin America Life

34


Latin America Life | Weak Growth Potential Amid A Difficult Macroeconomic Environment

35


– Difficult management of asset-liability mismatches for insurers carrying long-tail businesses such as workers' compensation and annuities in Colombia.

– Unfavorable country risk, characterized by unstable political environments and an economic slowdown attributed to COVID-19, and relatively high inflation.

– Lower disposable income for consumers means that life insurance sectors will likely remain immature and underpenetrated.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Country risk Investment performance risk Muted market growth prospects Government and regulatory policy risks

ROA To Feel Impact Of Lower Investment Returns And Higher Lapse Rates

Interest Rates To Keep High, But Reduced ROE Levels In A High Inflationary Environment

Latin America Life | Performance Metrics

36

Lockdown Measures To Have A Sizable Impact On Real Premium Growth In 2020

Note: f--Forecast. ROA--Return on assets. ROE--Return on equity. Source: S&P Global Ratings.

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

2018 2019 2020f 2021f

21%

22%

23%

24%

25%

26%

27%

28%

29%

2018 2019 2020f 2021f

(8%)

(4%)

0%

4%

8%

12%

2018 2019 2020f 2021f

Analytical Contacts

37

GlobalMario [email protected]

Developed EMEAVolker [email protected]

Asia-PacificCraig [email protected]

Latin AmericaAlfredo CalvoMexico [email protected]

North AmericaJohn [email protected]

Developed EMEAMark D [email protected]

GlobalAli [email protected]

mailto:[email protected]







38

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Top Risks For The Mario Chakar Global Insurance Industry ......Weak technicalresults An industry where technical performance, typically measured by combined ratios (non-life) and return