Insurers’ financial ratings have shifted significantly over the past year across the Asia-Pacific region, and ratings agency S&P Global says the majority of these shifts happened in May of last year, at the height of the COVID-19 pandemic.
Commenting on its data, director Craig Bennett said that insurer ratings were slowly experiencing “downward pressure” from April 2020, with significantly more insurers being given negative outlook ratings in May – and, at one stage, one in five insurers across the region had a negative rating.
He said that insurers with higher risk investment portfolios were the most affected, and the life sector in particular experienced more volatility compared to general insurers.
“The negative ratings pressure was largely captured in the first half of last year, where approximately 14% of APAC insurers had a negative outlook by June 2020,” Bennett said. “That was up from a low of about 2% in December 2019.”
“Of those changes, about 30% were in April and a further 48% were in May,” he explained.
“At the end January 2021, close to 20% - or one in five - of our ratings were either on a negative outlook, or on credit watch negative. The life insurance sector was the most affected with additional negative outlooks, and the added pressure on the life sector was recognised quite early and captured in our negative sector outlook.
“Positive outlook ratings also declined overall during this period.”
S&P conducted a number of ‘stress tests’ on insurers throughout the last year, gauging their reaction to a number of potentially difficult scenarios. However, he said the wider market situation has been constantly moving, leading S&P to factor insurer management responses into its analysis.
“The impact of COVID-19 was largely felt where insurers’ investment portfolios had material exposure to high-risk assets, or where they had a moderate capital adequacy buffer according to our measures,” Bennett said.
“In support of our analysis, S&P conducted a range of stress tests for hypothetical market movements, and analysed the pressure and potential impact of those changes on our view of capital adequacy for the insurers.”
“Some of these stressors were credit default, credit migration and property values, and the results were what we expected,” he said.
“The outcomes were then assessed against the current capital buffers of insurers.
“We also heightened our surveillance on insurer responses, as we wanted to make sure that while we conducted our stress tests, we also understood the dynamic responses of management in response to the external movements of the market,” he explained.