The failure of Silicon Valley Bank (SVB) highlights the importance of insurers managing enterprise, asset-liability and liquidity risks, according to a commentary by AM Best.
The Best’s Commentary, titled “SVB Collapse Highlights Critical Lessons for the Insurance Industry,” said that just eight US insurers have bond exposures greater than 2% of their capital and surplus, with the maximum being less than 5%.
Whether these bonds will become impaired is yet to be seen, AM Best said. The ramifications for equity portfolios could be more significant, as some major bank stocks have already lost significant value, according to the commentary. Five US insurers have equity exposures concentrated in the wider bank and trust sector that are greater than their capital, and 17 have exposures totalling at least 50% of their capital.
“Many insurers depend on banks for operational aspects, but generally are not as vulnerable to bank run-on scenarios, although they can occur as we’ve seen in the past, and emphasise the importance of a robust risk management structure, especially for annuity writers in a rising interest rate environment,” said Jason Hopper, associate director of industry research and analytics at AM Best. “Insurers that conduct detailed analysis on the impact of rising interest rates on their asset-liability portfolios and manage their impacts through capital and other risk management tools will fare better in those events than those that are less well-managed.”
SVB focused primarily on higher-risk tech startups, which have been impacted by rising interest rates and shrinking venture capital, AM Best said. As interest rates rose over the past year, venture capital firms found it harder to access funding, and many pulled their deposits from the bank.
Had the US government not intervened to make all depositors whole, underwriters of directors and officers insurance for venture capitalists, as well as the financial institution insureds supporting such entities, could have seen financial distress, as they operate on very thin capital, AM Best said.
“Since startups are by nature much more agile and less risk-averse than other companies, their directors and officers often make decisions quickly,” said David Blades, associate director of industry research and analytics at AM Best. “Therefore, the potential for D&O claims for startups would have been high in the case government had decided not to help the depositors.”
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