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This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

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In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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The Impact of COVID-19 on Insurance Ratings

The Impact of COVID-19 on Insurance Ratings

Gurdip Dhami

25 years: Treasury & ratings

In this video Gurdip outlines how the insurance rating criteria have been used by the rating agencies to assess the impact of COVID-19 on insurance companies.

In this video Gurdip outlines how the insurance rating criteria have been used by the rating agencies to assess the impact of COVID-19 on insurance companies.

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The Impact of COVID-19 on Insurance Ratings

17 mins 1 sec

Overview

In addition to the tragic loss of life, there have been negative economic and financial consequences of Covid-19 on many individuals, companies and governments throughout the world. Since the start of the pandemic, the credit profiles of a large number of entities have deteriorated as a result of revenue declines due to lock-downs, declines in financial markets, especially at the start of the pandemic, and low oil prices. The insurance rating criteria have been used by the rating agencies to assess the impact of Covid-19 on insurance companies.

Key learning objectives:

  • Understand how the rating criteria and issuer rating reports can be used to understand the approach of the rating agencies to Covid-19.

  • Understand how COVID-19 has affected the insurance companies

  • Understand how rating agencies have responded to COVID-19

  • Identify the most impacted credit rating factors due to Covid-19

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Summary

What actions have been taken by rating agencies in response to COVID-19?

The rating agencies have taken a large number of negative rating actions across various industry sectors. Negative rating actions are rating downgrades, credit watch negatives, or changes in outlooks from stable to negative and positive to stable.

  • Since March 2020 S&P has taken negative rating actions on approximately 2000 companies due to Covid-19 and low oil prices
  • In September 2020, S&P stated that it took negative rating actions across 41% of all its rated credits but it only took negative action on about 10% of its rated insurers
  • Most of Moody’s and Fitch rated insurance companies have had no change in their ratings as a result of Covid-19 either. Fitch affirmed 67% of its rated insurers and where it did take negative action, these were changes in outlook not downgrades

How has Covid-19 affected the insurance companies?

  • Capital adequacy is reduced by falls in equity markets, increased credit spreads, lower ratings of corporate bond holdings and lower interest rates
  • Profitability is reduced by increased insurance claims due to event cancellation and business interruption
  • Lower economic activity reduces premiums from business customers, and stock market volatility reduces the number of retail buyers of investment products
  • Profitability falls as investment income reduces due to lower interest rates although these may be offset by MTM gains on investments
  • Pay-outs from Life insurance policies increase due to Covid-19 related deaths which leads to increased costs and reduced profitability

How have rating agencies responded to COVID-19?

  • The rating agencies used their own Covid-19 stress assumptions to stress test the profiles of their rated insurers
  • They then compared the results to the guidelines outlined in their rating criteria, as well as the rating sensitivities outlined in their rated insurers' rating reports

Which credit rating factors are impacted most in the short-term?

  1. Asset Quality - It is based on the quality of an insurance company’s investment portfolio which usually contains mostly corporate bonds, equities and property. Asset quality will weaken if there are falls in the value of these assets. Eg. for example through rating downgrades.
  2. Capital Adequacy - It is weakened by the reduction in the value of the investment portfolio. Additionally, increased insurance claims, reduced premiums and reduced investment income reduce shareholders’ equity in turn reduces capital.
  3. Leverage - It increases when shareholders’ equity decreases as a result of increased insurance claims, reduced premiums, investment losses and reduced investment income.
  4. Profitability - It decreases due to increased insurance claims, reduced premiums, investment losses and reduced investment income.

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Gurdip Dhami

Gurdip Dhami

Gurdip has 25 years of experience in the financial services industry. He has had roles in corporate treasury, risk management, debt capital markets, debt advisory, ratings advisory and financial reporting. During this time, Gurdip has worked at Standard Chartered Bank, JPMorgan and RBS. He is currently a Non Executive Director, writer and trainer.

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