businessman with binoculars / Sezeryadigar

The effects of the Covid-19 outbreak will resonate throughout the North American insurance industry for years, says Fitch Ratings.

In a new report, the rating agency said that the pandemic has accelerated many of the challenges that were already facing the industry, such as a prolonged low-rate environment, the digitization of the insurance business and the growing demand for sustainable investing.

“Lower interest rates for longer will negatively impact all insurance sectors,” Fitch said, noting that the life insurance sector will be hit hardest.

“Investment risk, such as credit risk, liquidity risk, interest rate risk and/or equity risk, is expected to increase across all sectors as insurers reach for yield, especially in life and long-tail P&C,” Fitch said.

As the low-rate environment pressures investment income and earnings, Fitch said that insurance prices for customers are expected to rise.

At the same time, the industry can expect to see compliance costs rise as regulations tighten.

“The breadth and magnitude of insurance regulatory changes will depend on the industry’s financial health coming out of the crisis,” Fitch said, adding that regulators are expected to focus on how insurers treated their customers during the pandemic.

“Any regulatory response will depend on actions insurers take to mitigate issues that could accentuate regulatory involvement,” Fitch said.

Additionally, the large fiscal response to the crisis from governments may lead to rising taxes down the road, which could also weigh on earnings.

Finally, Fitch said that it expects to see greater emphasis on ESG in the wake of social unrest and the pandemic’s disproportionate impact on minority groups.

In the face of these trends, Fitch said that “most companies, including insurers, want to be seen as part of the solution.”

From a financial perspective, the increased cost of ESG efforts is expected to be offset by the industry’s enhanced image.

“However, ESG is likely to become increasingly negative for insurers that are slow or reluctant to adapt,” Fitch warned.