One of ICMIF’s Supporting Members, the rating agency AM Best, announced last week that it 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.
According to AM Best, the COVID-19 virus is unique in its scope and complexity of potential losses, and the uncertainty regarding the near-term impacts further exacerbates the situation. Consequently, the direct and indirect effects of the outbreak may not be understood fully for some time. AM Best has conducted stress tests of this nature following previous then-unprecedented events, such as September 11 or the Eurozone crisis. In the United States, 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, and on 16 March 2020, AM Best revised the US life/annuity industry’s market segment outlook to negative (please see related press release).
AM Best said in a press release that it 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, it is believed that 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 says it realizes that this is a difficult time for companies to produce additional information, and as a result, the rating agency will delay by one month its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ) to 1 May 2020, through its Client Rating Portal. A questionnaire also will be issued to rated entities to determine 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. AM Best also will seek results of each organization’s own stress tests, which are typically considered in the assessment of each rating unit’s enterprise risk management framework.
AM Best will provide future updates as warranted and will monitor the financial impact on rated entities closely and provide updates on Credit Ratings as necessary.
A video discussion of what steps AM Best is taking to assess the impact of the coronavirus on the insurance industry with James Gillard, Executive Vice President and Chief Operating Officer, and Stefan Holzberger, Senior Managing Director and Chief Rating Officer, both of AM Best Rating Services, also is available.
AM Best also added that as an organisation it is very cognisant of the health and safety of its employees, rated entities’ employees and all of its stakeholders, and has taken precautions such as use of video conferencing to mitigate any spread of the coronavirus.
