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Insurers stuck between policies and politics

Well-capitalised and possibly still profitable, the industry nonetheless finds itself in a catch-22
Insurers stuck between policies and politics

Ahead of the new tax year, UK insurers were reportedly updating policies to remove references to pandemics and wording that could leave them liable to future coronavirus claims.

On one level, that’s eminently sensible. Insurers are not charities, and are only able to provide cover by pooling collective exposure to unforeseen risks. There’s little sense in walking out into a packed motorway, after all.

But the anecdotal evidence mirrors two themes that explain why sector share prices have been so badly impaired, despite little tangible evidence that the coronavirus will prove a catastrophic hit to insurers’ reserves and capital.

The first is implied: if insurers were indeed scrambling to tweak policies, does this mean valid claims might already be massive?

Here, it is hard to say. Direct Line (DLG) reported a spike in travel claims in March, although this was beneath its reinsurance threshold and likely to be offset by lower motor claims. Peel Hunt reckons the hit from business claims including interruption, general liability and event cancellation insurance could have a “material impact” on the likes of Beazley (BEZ), Lancashire (LRE) and Hiscox (HSX), although the latter has said pandemics are only covered in a “very small part” of its portfolio.

The second theme is equally hard for investors to process: how beholden are insurers to political pressure, and what is the cost of a conciliatory approach to claims?

Judging by the tone of some lawmakers and regulators, it seems increasingly likely that a highly solvent sector will be asked to share some of the broader economic pain – even if specific risks are not covered. Here, we are treading into the unknown.

Then there is optics, which explains why regulatory pressure is mounting in both the UK and Europe for dividend cuts. “When deciding on distributions boards should satisfy themselves that each distribution is prudent and consistent with their risk appetite,” wrote the Prudential Regulation Authority in a letter to insurance CEOs last week. In doing so, the watchdog wants companies to play their “full part in supporting the real economy throughout the economic disruption arising from Covid-19”.

When national duty is invoked in this way, you can forget shareholder primacy. As such, until they are paid, the dividends of UK giants Aviva (AV.), RSA (RSA), and Direct Line (DLG) all look vulnerable, despite those companies’ varying exposure to coronavirus-related claims.


See below for our entire FTSE350 review:

FTSE350 profitability: the direction is clear but not the severity

FTSE350 Review: Coronavirus and the dividend dilemma

FTSE350 groups scramble for cash

Aerospace on the descent as defence stays on course

Banks face capital test

Construction hits the brakes once again

Coronavirus threatens electronics and technology

Engineering and industrials braced for a downturn

Few guarantees for financial services

Food and soap in high demand

Coronavirus slams high street doors shut

Home renovations on hold

Insurers stuck between policies and politics

Miners hold on to their hats in Covid rout

Supermarkets thrive but coronavirus harms other personal goods

Oil companies suffer Covid-19 crunch

Pharma giants entering the testing fray

Property income prospects dimmed by Covid-19

Subscription-based models make for sturdy businesses

Downturn threat obscures outlook for outsourcers

Are telcos still a defensive play?

Coronavirus wrecks UK leisure time

Utilities look resilient amid Covid-19 chaos