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Law360, London (March 17, 2020, 4:09 PM GMT) -- The British government should consider suspending insurance tax and loosening regulation over capital requirements, insurance consultancy Mactavish said Tuesday, warning that the impact on insurers from market losses related to the novel coronavirus could be worse than after the 9/11 attacks in the U.S.
Mactavish said that many insurers could raise premiums and reject more claims in order to make up losses from investments, which would in turn have a wider business impact on a U.K. economy already teetering on the edge of recession.
The company called on the government to suspend insurance premium tax, which is levied on insurers at 12% of the cost of each policy sold, as well as loosen its capital requirements on insurers, enshrined in the European Solvency II regulations.
"[The coronavirus] could see insurers increase their premiums to recoup poor returns and improve their cash reserves, reject more claims, slow down the process of settlements, and stop providing cover in certain markets," said Bruce Hepburn, chief executive of Mactavish.
"The overall impact of coronavirus on the insurance sector could be more devastating than 9/11," he added, referring to the World Trade Center terrorist attack in 2001 which cost insurers $32 billion in claims and tanked the stock market.
Part of the problem was that insurers had increasingly switched to riskier investments in recent years because of prolonged low interest rates, which were now looking more vulnerable to shocks.
In return for government aid and tax relief, Hepburn said insurers should agree to freeze premium price increases as more companies in sectors like hospitality struggle to recover from lost business as a result of the pandemic.
The warnings come as credit ratings agency Moody's said on Tuesday that investment losses could erode the capital buffer that European insurers are required to keep under Solvency II laws.
"Recent significant financial market fluctuation driven by the coronavirus outbreak will erode insurers capital in the short-term," Helena Kingsley-Tomkins, an analyst at Moody's Investors Service, said. "Low interest rates, with bond yields dropping to record lows in March, will further pressure European insurers' profitability and economic solvency over the coming quarters."
--Editing by Rebecca Flanagan.
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