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The majority of rated re/insurers can withstand pandemic shocks, says A.M. Best

18th May 2020 - Author: Luke Gallin

Global financial services ratings agency, A.M. Best, has said that initial stress testing shows that the majority of its rated insurers can withstand potential shocks to their balance sheets as a result of the ongoing COVID-19 pandemic.

The ratings agency announced in March that it was in the process of developing stress testing that it will use to gauge the impact of the outbreak on its rated re/insurance companies.

The stress test analysis covered roughly 1,400 rating units across the globe, and focused on the impact of the current crisis on both assets and underwriting.

According to A.M. Best, the results of its recent stress test confirm that the global insurance market is well capitalised, with the majority of rated insurers and reinsurers performing well in the stress test.

By segment, and the ratings agency reveals that property/casualty insurers in both the U.S. and Canada performed relatively well, compared with life/annuity and U.S. health carriers. Across the Asia-Pacific region, the majority of companies generally performed well also, as did rated entities in Europe, the Middle East, and Africa and Latin America.

Ultimately, says A.M. Best, those rated insurers operating in domiciles in the higher country risk tiers were more vulnerable to potential shocks.

Mahesh, Mistry, Senior Director at A.M. Best, commented: “Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalization. Reputational risk in certain markets may also be a problem, as any legal disputes become more visible to consumers, policyholders, regulators and legislators.”

The results of the stress tests revealed that the median Best’s Capital Adequacy Ratio (BCAR) score at VaR 99.6 of the rated population fell to 43% from an estimated year-end 2019 BCAR of 49%, which, A.M. Best says shows the resilience of the insurance industry.

The analysis suggests that the impact was greater for L/A insurers with high asset and mortality risks, insurers with material exposure to mortgage loans, those operating in domiciles in the higher country risk tiers, and also some smaller firms with smaller capital buffers.

Despite the fact that most rated entities performed well during the stress test, A.M. Best warns that credit rating pressure could materialise if conditions deteriorate. This includes a second wave of mortality losses arising from a resurgence of the pandemic, a substantial spike in claims, and further deterioration of financial markets leading to material investment losses or write-downs of assets.

First-quarter 2020 results have shown that companies are taking hits to both underwriting and investment portfolios as a result of the pandemic. Initially, it seemed as though the asset hit was going to be the more substantial, but there’s been somewhat of a recovery in certain areas in recent weeks.

Of course, the duration of the pandemic and the severity of the subsequent economic fallout remains widely uncertain, and as such, it’s still very unclear just how impactful the event will be for companies’ balance sheets.

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