Vulnerabilities and resilience in insurance investing: studying the COVID-19 pandemic

The COVID-19 crisis has major impacted the insurance industry in three dimensions: business operations, underwriting and claims and insurance investing. This paper will analyse the implications for insurance investing. We start by showing the impact of the severe drawdown in the equity markets during the initial phase of the crisis in March/April 2020 on a typical insurer's balance sheet. We then look at the effects of the dislocations in fixed income, which make up the largest share of exposures in insurance companies' portfolios. We track the performance of investment grade credit during the year while paying special attention to the impact of downgrades on insurers' solvency capital. We finally study alternative investments with particular focus on private markets. These investments are a faster-growing part of insurance companies' exposures and pose specific challenges as they are complex, more difficult to access, have limited liquidity and are often harder to price, especially during times of high market volatility. Yet, compared to their equivalent public market exposures, private investments provide additional income, which allows insurers to charge lower rates on their products to policyholders. As the sophistication and complexity of investments keep growing, companies as well as regulators need to find a good balance between policyholder protection and market efficiency.