Pandemic-related stress test for rated insurers

AM Best has announced that the ratings agency 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 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 Sept. 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 March 16, 2020, AM Best revised the U.S. life/annuity industry’s market segment outlook to negative

AM Best believes the insurance industry is more resilient presently with respect to financial market downturns than it was during the 2008-2009 financial crisis, which put heavy attention on liquidity risk. Currently, 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 realises that this is a difficult time for companies to produce additional information, and as a result, will delay by one month its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ) to May 1, 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.