The coronavirus outbreak and looming shutdown will have a variety of second-order effects that are just becoming more clear and tangible. One clear loser from this situation is insurance companies which will probably see massive payouts and also have to deal with the additional challenge of negative or zero percent interest rates.

Incalculable Risk

Most, insurance companies are not exposed to the risk of a pandemic. However, they are exposed to the risk of a recession and any spike in bankruptcies which leads to companies drawing down credit lines that are backed by insurance companies especially following Dodd-Frank guidelines. Absent Congressional intervention, it's quite possible there will be bankruptcies in the airlines, retailers, restaurants, cruise ships, and casinos that will lead to large losses for insurance companies involved in these industries.

Another source of concern is trade credit insurance which basically means that insurance companies cover the risk that a customer cannot make good on its purchases for items or services bought on credit. Even before the coronavirus outbreak, corporate bankruptcies were on the rise. This situation will only exacerbate and expose the weakest companies who are all going to see sharp drops in revenue in the coming weeks.

As opposed to other natural disasters that are localized in a certain region and for a fixed amount of time, the coronavirus is all over the world. Insurance companies will offset risk with exposure to different parts of the world and industries. However, this isn't possible with a global pandemic like the coronavirus. It's also unknown whether this blows away in a couple of weeks or is something that will go on for months or will go away after a couple of weeks but then come back with even more vengeance in the winter months.

Low Rates

Typically, insurance companies buy Treasuries to hold as capital reserves. By law, they must keep some portion of future payments aside. As interest rates drop, they must allocate more money to Treasuries in order to maintain proper ratios. Due to weakness in rates, insurance companies have increased exposure to riskier high-yield corporate debt. Of course, these are plummeting in value which is forcing insurance companies to increase reserves.

While the economic effects of the coronavirus are raging and negatively affecting every industry, insurance companies are facing pressure from a variety of sources.