Improved enterprise risk management (ERM) measures implemented by life / health (L&H) insurers in the aftermath of the 2008 financial crisis are expected to be put to the test by the global COVID-19 pandemic, according to A.M. Best.
The ratings agency notes that the large majority, if not all life insurance companies include a pandemic scenario within their testing, which suggests that firms will proceed with “clear and actionable” plans throughout the current crisis.
Insurers with sound ERM practices that exhibit the effective execution of strategies within stated tolerance levels, will preserve, and have the potential to bolster balance sheet strength over the long-term, says A.M. Best.
However, the inability to operate effectively by managing worst-case scenarios means that companies are still expected to experience some pain from the crisis.
“AM Best’s view is that the majority of the life industry already was in a position to absorb the downturn in the economy, although it will have to contend with serious earnings headwinds from the impact of low interest rates and declining sales in the near to medium term,” explains the ratings agency.
At the same time, A.M. Best warns that certain companies will not perform well during this crisis for various reasons, potentially resulting in rating downgrades. In conversations with rated entities, A.M. Best has heard that all firms’ contingency plans are operative and take into account a significant level of remote workers.
Looking at health insurance companies, and the ratings agency feels that a rise in loss ratios is likely, the severity of which is dependent on the spread of the novel COVID-19 coronavirus, combined with the negative impact on premiums owing to layoffs and financial hardship.
A certain level of the adverse financial impact from the virus outbreak should be offset by health insurers’ stronger risk-adjusted capitalisation, which A.M. Best says is a result of favourable earnings over recent years.
“In addition, most health insurers’ rates are set annually, with rates adjusted at renewal, so the financial impact may be limited to 2020,” says the ratings agency.
In light of the ongoing pandemic, A.M. Best recently revised its market segment outlook on the U.S. life/annuity segment to negative from stable. The rating agency has warned previously that the rapid spread of the virus throughout the U.S. could hit health insurers in the country in a number of ways.
