• Prolonged decline in new motor vehicle sales to hurt motor insurance business, , which is the most dominant business line for the APAC non-life sector.
• Companies with significant allocations to equity investments to see capital declines in next quarter and
• Investment income to fall yoy with lower bond yields.

Fitch Ratings has revised the sector outlook for the underlying fundamentals of the non-life insurance industry in APAC, which includes China, Japan and South Korea, to negative from stable due to the impact of COVID-19, the disease caused by the coronavirus, on near-term performance and the credit quality of insurers.

The slowdown in economic activities will affect APAC insurance demand. A prolonged decline in new motor vehicle sales will hurt the motor insurance business, which is the most dominant business line for the APAC non-life sector. APAC non-life insurers' exposure to lines directly vulnerable to the coronavirus pandemic is relatively modest. We do not anticipate a significant increase in loss ratios in the near term due to the claims experience from these events, but uncertainty regarding future sources of underwriting losses will expand as the duration and severity of the crisis lengthen. APAC non-life insurers' risky asset exposure is generally lower than that of life insurers, but increased financial market volatility could weaken investment performance and solvency stability.

Fitch's Outlook for ratings in the sector remains Stable. "However, we are in the process of reviewing our insurance ratings relative to assumptions of the impact of the coronavirus on capital-market volatility, interest rates, market liquidity and insured claims or reserves," Fitch said.

Fitch will compare the pro forma profile of an insurer with the existing rating sensitives established by the agency. If sensitivities are notably breached, ratings will be placed on Rating Watch Negative (RWN) or downgraded. Fitch is at the early stages of this review.

"We currently believe the ratings of non-life insurers will be less affected by the pandemic than those of life insurers," Fitch noted.

Fitch recently revised the rating Outlook for the APAC life insurance industry to negative from stable. However, Fitch's Stable rating Outlook for the APAC non-life sector does not imply that no ratings in the sector will be hurt by these ongoing events.

Ratings that currently have a Positive rating Outlook across all insurance sectors are being prioritised during the review process. In addition, Fitch expects the ratings of some non-life insurers to be placed on RWN. Near-term downgrades are possible, but currently viewed as unlikely.

"The pandemic is posing challenges to performance in 2020 with the recent shifts in investment market and economic conditions. Companies with significant allocations to equity investments will see capital declines in the next quarter and investment income will also fall yoy with lower bond yields. A move towards an economic recession could slow premium growth through declines in insured exposures or renewed competitive pressure that restricts pricing momentum," Fitch said.