Global rating agency AM Best has announced that it is developing a stress test that it will conduct on its rated insurance agencies’ balance sheets to assess the effect of the COVID-19 outbreak on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other risk factors.
“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,” AM Best said. “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 US, current economic conditions are more likely to affect the balance sheets of life and annuity insurers than those of property-casualty insurers, AM Best said. As of Monday, the rating agency had revised the US life/annuity industry’s market-segment outlook to negative.
Still, AM Best said that it saw the insurance industry as more resilient today to market downturns than it was during the 2008 financial crisis.
“At this time, rated companies are expected to be able to meet their commitments, despite the rapidly evolving situation,” the company said. “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.”
The rating agency said that it understood that many companies might have difficulty producing additional information during the outbreak. Therefore, it will delay by one month its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ). Companies will now have until May 01 to submit SRQs through AM Best’s Client Rating Portal.
“A questionnaire will also 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 said. “AM Best will also seek results of each organisation’s own stress tests, which are typically considered in the assessment of each rating unit’s enterprise risk management framework.”