UK stock markets could be at risk if Britain's largest investors - insurance and pension funds - are not protected against the full fall-out from coronavirus, brokers have warned.
Independent insurance and dispute resolution specialist Mactavish welcomed measures put in place last month by the government to underpin insurance claims caused as a result of the coronavirus-induced lockdown.
However, Bruce Hepburn, chief executive of Mactavish, warned the government needed to do more to support insurers and reinsurers in the event of greater-than-anticipated claims drawing on insurers' reserves.
He warned unless more was done to underpin insurance firms, they could end up having to fire-sell investments into an already falling market.
With the losses already incurred on insurers' portfolios as a result of Covid-19 and the Saudi-Russian oil standoff pushing markets to unprecedented lows in just a matter of weeks, if insurers had to sell assets to fund claims, this could have a devastating effect on the stock market, with insurance companies and pension funds being the UK's biggest shareholders.
Mr Hepburn said: "In recent years, insurers have increased their riskier asset classes, in addition to their traditional investments in low risk corporate and sovereign bonds, many of which are increasingly returning low yields.
"Partly as a result of this decline in yields, insurers have tended to move away from long-term debt towards short-term gilts which must be rolled over more frequently. In addition to this, they have also increased their exposure to illiquid assets, such as private equity and infrastructure, making it more difficult to manage their reserves and cash flow.
“For insurers, the impact on the investment landscape will be more pronounced than coronavirus itself. It 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.
"They may also include more restrictions on the policies they do underwrite”.
He added: "The overall impact of coronavirus on the insurance sector could be more devastating than 9/11. Prior to the emergence of coronavirus, insurers were already coming under considerable pressure and we were already seeing the classic symptoms of a hard market.
"Coronavirus has just made this situation worse. In the long run, this could herald a seismic transfer of risk back onto companies who will in turn be forced to allocate more of their own capital to protecting themselves against high-severity losses, limiting their activity and ability to create returns for shareholders.”
Moreover, he warned that any losses insurers have incurred on their investments in recent weeks could lead them to increase the premiums they charge, cutting down on claims being paid on time and slowing down the payment of settlements, "all of which will worsen an already severe expected recession".
But Mark Andrews, director of insurance for Altus Consulting, defended any actions insurers might have to take - such as raising premiums or tightening up on criteria - to prevent them from having to fire-sell into a falling market.