Insurers look well placed to withstand the impact of COVID-19, according to initial stress testing conducted by AM Best.
The rating agency conducted its stress tests to gauge the preliminary impact from the COVID-19 pandemic on its rated insurance companies’ financial strength. It found that overall insurers’ capital levels provided an adequate buffer against a potential shock to their balance sheets.
Life and health insurers had a greater exposure than many other insurers, AM Best said, given high asset and mortality risks. Those with material exposures to mortgage loans, and those operating in high risk countries, also look more vulnerage, it said.
AM Best singled out property and casualty insurers in the US and Canada as having performed relatively well in the stress tests.
Mahesh Mistry, senior director at AM Best Rating Services, said: “Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation.”
He also warned reputational risk could be a particular problem in some markets, as legal disputes become more visible to the public, as well as regulators and legislators. The stress test did not take into account a scenario in which contracts could be voided, AM Best added.
The rating agency warned companies that have performed well in its stress test could still face credit rating pressure if conditions deteriorate beyond its envisaged scenarios. These include a second wave of mortality losses arising from a resurgence of the pandemic, and a significant spike in claims experience for commercial lines segments, such as event cancellation, business interruption or trade credit insurance.
The potential impact of rulings on contract clauses, results of litigation and government decisions, and a further deterioration of financial markets resulting in material investment losses or writedowns of assets, were also considered.
AM Best ran its analysis on approximately 1,400 rating units worldwide, and focused on the impact of COVID-19 on underwriting and assets.
AM Best, Mahesh Mistry