AM Best to 'stress test' insurers for coronavirus pandemic impact
Ratings agency AM Best is developing stress testing that it will conduct on its rated insurance companies’ balance sheets to gauge the impact of the COVID-19 virus fallout on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities.
The agency said that the COVID-19 virus, which has been declared a pandemic by the World Health Organisation (WHO), is unique in its scope with complex potential losses and uncertain near-term impact. Hence, the direct and indirect effects of the outbreak may not be fully understood for some time.
AM Best has conducted such stress tests in the past for events such as Sept. 11 or the Eurozone crisis. In the US, it says the current economic conditions are seen as more likely to affect the balance sheets of life/annuity insurers than those of property/casualty or health insurers. Thus, the agency has revised the US life/annuity industry’s market segment outlook to negative.
AM Best believes the insurance industry is more resilient today to financial market downturns than it was during the 2008-2009 financial crisis, which put heavy attention on liquidity risk.
"At this time, rated companies are expected to be able to meet their commitments, despite the rapidly evolving situation. With these coming stress tests, access to liquidity, as well as the laddering and maturing of debt securities within the capital structures of insurance companies, will be additional areas of focus," AM Best said.
AM Best has issued a questionnaire to its rated insurance companies asking them about how their operations have been affected by the pandemic, which lines of business they expect to be negatively impacted most or if they expect any overall assumptions or forecasts to change.
