Allianz SE Chief Executive Officer Oliver Baete warned the coronavirus has upended insurers’ business models and will cause “massive” losses across the industry.
Oliver Bäte said in an interview with Bloomberg Television that while the company itself doesn’t have large exposures, for the industry, losses from the COVID-19 coronavirus pandemic are going to be massive.
The unprecedented changes and challenges created by the ongoing pandemic has resulted in an uncertain outlook for insurers and reinsurers. Bäte highlighted the severe economic disruption being caused by the virus, telling Bloomberg that the pandemic hit the industry “like a meteorite impact.”
“There’s a lot of debate about are insurers really putting up. I can tell you that across sectors, whether that’s business interruption, travel, media and entertainment coverages, there will be huge losses for the industry coming. It just takes a while for those to materialise. So, 2020 is not going to be a record earnings year for the insurance industry,” said Bäte.
Across the insurance and reinsurance industry, there’s been debate around the potential size of losses on the underwriting side as global efforts to stop the spread of the virus have forced entire economies to slow dramatically, he said.
While there’s notable uncertainty surrounding the potential business interruption exposure, something that’s been well documented throughout, there’s an expectation for some sizeable losses in other lines.
The virus has forced closures across the entire economy and not just in a limited number of cases, Baete said. Any recovery from those shutdowns will likely take longer than people currently predict, he said.
“The coronavirus has hit our industry like a meteorite impact,” Baete said in an interview on Bloomberg Television. “There will be huge losses for the industry coming, it just takes a while for those to materialize.”
Commercial credit insurers provide cover for businesses in case customers pay bills late or default. Baete said in February that Allianz’s biggest potential risk would be from any bankruptcies in Europe spurred by the virus’s spread, which would hit its credit insurance coverage in the region.
Baete spoke just after the German government unveiled a plan, first reported by Bloomberg, to backstop losses at commercial credit insurers to keep trade flowing and prevent bankruptcies. Allianz is one of the companies to benefit because one of its units, Euler Hermes Group, is among the top players in that market.
The German government said it would provide a backstop for losses of €30 billion for commercial credit insurers in 2020, in return for 65% of their premiums.
Bäte praised the government’s plan, but said that moving forward, the industry needs to look across numerous sectors and exposures and look at ways to better protect society against a systematic impact.
“Please remember, systemic risk is not something that the insurance industry can insure. We rely on diversification over time and in the portfolio. Corona, or any large pandemic, is a systemic event that does not have diversification. So, the industry economic model cannot really work,” Bäte told Bloomberg.
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Furthermore, widespread financial market volatility and stressed equity markets caused by the pandemic will also challenge firms’ investment performance in the weeks and months ahead.
While Allianz is strong enough to shoulder claims, its business model would require it to scale back coverage without a backstop, reinforcing the impact of the virus on global trade, Baete said.
“It’s a very, very important measure the government has taken,” Baete said. “We are extremely stable, we could absorb all the losses,” but if insurers cut back coverage, “then people will further reduce trade.”
Under the German plan, the government will backstop losses of 30 billion euros ($33 billion) for commercial credit insurers this year. In return, insurers will surrender 65% of their premiums to the government while continuing to provide coverage.
Allianz so far has “not incurred any significant losses” in its investment portfolio and was actually doing well in some areas, such as at its bond manager Pacific Investment Management Co., he said.