Page 14 - Layout 1

Insurance
Continued from p12
these lines for Gibraltar insurers. So, counter-intuitively, we consider
that the short-term impact on solvency ratios of Gibraltar insurers is likely to be beneficial, primarily as a result of falling premium income.
In the medium and long term, the impact is harder to predict with considerably more influences on the ratio to factor in.
Whilst Covid-19 is a humanitarian disaster, the number of people affected in the wider population is still a relatively small percentage and likely to remain so.
This is particularly the case away from the front line which is where the insurance industry is positioned. Also, the insurance industry is generally more mobile than most and so it is considered that it is unlikely to be materially impacted from an operational perspective. We have seen this with Gibraltar insurers that we are familiar with; operationally, they have proved resilient with most key functions now relocated to home environments.
Shareholders of (re)insurers may be
less willing to commit capital due to liquidity and/or solvency concerns. Some reinsurers will become insolvent resulting in credit events for insurers.
Investors may be similarly less willing to provide capacity. Capacity in the reinsurance markets may be affected which could result in further increases to reinsurance costs coming hot on the heels of rate rises due to the UK’s Ogden discount rate decision in July 2019.
Insurers’ expense base is largely fixed and so reductions in business
volumes will reduce profitability. Adjusting the expense base is slow and can incur additional costs.
The markets have suffered and so there will be pressure on asset valuations. Insurers tend to be conservatively invested as a result of Solvency II but we think there will still be an impact at some point.
Insurers will need to focus on liquidity from all sources although it is expected that state interventions will help here. The likelihood of insolvencies
caused by liquidity strains will increase. There is a potential increased risk of
frauds, both in the scope for fraud and the likelihood of it occurring as people’s circumstances deteriorate.
Finally, it is likely that with the lockdowns, activity such as claims adjusting will operate less efficiently with the potential for increased claims leakage and a slow-down in settlement patterns.
It is hard to say exactly how solvency ratios will be impacted since there are many influences, as we have set out. However, it is believed that negative influences will outweigh positive ones meaning that solvency ratios are likely to suffer in the medium to long term with the resulting potential for increased regulatory scrutiny and, ultimately, failures.
Insurers should think through these issues to see how their businesses are exposed. In our experience it is important to balance quantitative analysis, including running revised scenarios through their capital models, and qualitative analysis where the focus should be on risk management. This will help to gain insight into the dynamics and to understand which influences are dominant.
In this more volatile environment insurers should be considering the appropriateness of their risk appetite statements as well as their capital buffer over regulatory minimum levels.
It is expected that all Boards will need to revisit business plans and ORSAs as existing scenario modelling is unlikely to capture the full range and extent of stresses to businesses caused by Covid 19.
‘So, counter-intuitively, we consider that the short-term impact on solvency ratios of Gibraltar insurers is likely to be beneficial
www.robusgroup.com
14 Gibraltar International
www.gibraltarinternational.com
‘