A.M. Best Developing COVID-19 Stress Test for Rated Insurers

A rope being pulled apart and breaking with the word stress in the middle of the break

March 19, 2020 |

A rope being pulled apart and breaking with the word stress in the middle of the break

A.M. Best is developing stress testing that it will conduct on all its rated insurance companies' balance sheets to gauge the impact of the COVID-19 outbreak on risk-adjusted capital levels, investment portfolios, reserve adequacy, and other aspects of risk borne by rated companies.

In a statement, A.M. Best noted that the novel coronavirus and the COVID-19 disease it causes are unique in the scope and complexity of potential losses. The uncertainty regarding the outbreak's near-term impacts further exacerbates the situation, the rating agency said. "Consequently, the direct and indirect effects of the outbreak may not be understood fully for some time," A.M. Best said.

The universe of companies rated by A.M. Best includes more than 200 alternative risk transfer entities, including single-parent and group captive insurance companies, risk retention groups, and protected cell captives.

A.M. Best noted that it conducted similar stress tests following previous unprecedented events such as the September 11, 2001, terrorist attacks or the Eurozone crisis. In the United States, current economic conditions are seen as more likely to affect the balance sheets of life/annuity insurers than those of property-casualty or health insurers, A.M. Best said.

The rating agency said it believes the insurance industry is more resilient today to financial market downturns than it was during the 2008–2009 financial crisis, and at this time, it expects rated companies to be able to meet their commitments despite the rapidly evolving situation. Rated companies' 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 in the coming COVID-19 stress tests, A.M. Best said.

Recognizing the challenges companies are facing in the current environment, A.M. Best said it would delay its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ) by 1 month to May 1. A.M. Best also will issue a questionnaire to rated entities to determine how the pandemic has affected their operations, which lines of business they expect to experience the greatest negative impacts, and if they expect any overall assumptions or forecasts to change.

The rating agency said it also will seek results of each organization's own stress tests, which are typically considered in assessing each rating unit's enterprise risk management framework.

A.M. Best said it will provide future updates as warranted and will monitor COVID-19's financial impact on rated entities closely and provide updates on credit ratings as necessary.

March 19, 2020