Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation
Initial stress testing conducted by AM Best to gauge the preliminary impact from the COVID-19 pandemic on its rated insurance companies’ financial strength found that most insurers’ capital levels provided an adequate buffer against a potential shock to their balance sheets.
Sensitivity to the pandemic was greater for life/health insurers with high asset and mortality risks; insurers with material exposures to mortgage loans; carriers operating in domiciles in higher country-risk tiers; and companies with smaller capital bases.
The stress test analysis covered approximately 1,400 rating units worldwide, and focused on the impact of COVID-19 on underwriting and assets. Overall results showed that the median Best’s Capital Adequacy Ratio (BCAR) score at VaR 99.6 of the rated population declined to 43% from an estimated year-end 2019 BCAR of 49%, demonstrating the resilience of the insurance industry. Property/casualty insurers performed relatively well, compared with life/annuity and health insurers.
“Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation,” said Mahesh Mistry, senior director, AM Best Rating Services. “Reputational risk in certain markets may also be a problem, as any legal disputes become more visible to consumers, policyholders, regulators and legislators.” The stress test did not take into account a scenario in which contracts could be voided.
The unprecedented impact of COVID-19 on the industry and its effect on global economic volatility imply that companies that have performed well on AM Best’s stress test could still face credit rating pressure if conditions deteriorate beyond the prescribed scenarios.
These include a second wave of mortality losses arising from a resurgence of the pandemic; a significant spike in claims experience for commercial lines segments, such as event cancellation, business interruption or trade credit insurance; rulings on contract clauses, results of litigation and government decisions; and further deterioration of financial markets resulting in material investment losses or writedowns of assets.
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