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AM Best webinar: Initial COVID-19 stress test finds U.S., Canadian life/health writers most impacted.
  • David Pilla
  • July 2020
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Mahesh Mistry, AM Best

Stress test results in areas outside the United States—Europe, Middle East and Africa Asia-Pacificand Latin America—were “reasonably good” and “probably slightly better” than in the U.S. market.

Mahesh Mistry
AM Best

As underwriters wade through their second quarter and try to find firmer footing under the COVID-19 burden, AM Best drew lessons from its first round of insurer stress testing related to the pandemic.

COVID-19 created adverse macroeconomic conditions across all industries and geographies leading to “a severe economic contraction” in the second quarter of 2020 along with heightened financial volatility across a number of asset classes, Stefan Holzberger, chief rating officer, AM Best, said in a webinar.

For the insurance industry, he said, the lines most affected are travel insurance, event cancellation, credit and surety, directors and officers, errors and omissions and employment practices liability.

“In addition, mortgage insurance will be under strain with a delayed effect due to the forbearance rules,” said Holzberger. “There's a great deal of uncertainty with regard to losses stemming from workers' compensation.”

He also noted “efforts to retroactively change the contract terms of business interruption policies remain a serious concern although there have been some positive developments in some states.”

Holzberger's comments were part of a webinar, AM Best Panel: COVID-19 Stress Testing Results and Next Steps, held in conjunction with a new Best's Special Report, Stress Testing Rated Companies for COVID-19, a stress test analysis that covered about 1,400 rating units worldwide, and focused on the impact of COVID-19 on underwriting and assets.

Overall results showed the median Best's Capital Adequacy Ratio score at Value at Risk 99.6 of the rated population declined to 43% from an estimated year-end 2019 BCAR of 49%, demonstrating the resilience of the insurance industry. “Interest-sensitive life and annuity products will see compressed margins, and our outlook for health care in the U.S. remains stable, but this is a segment we're watching closely,” said Holzberger.

AM Best on March 18 announced plans to develop BCAR ratio stress testing for insurers it rates, said Stephen Irwin, managing director, AM Best. “Shortly thereafter, we requested information from the industry through the release of a COVID-19 questionnaire.”

Irwin said the questionnaire allowed a clearer picture of insurers' sensitivities “given the considerable uncertainty about the potential evolution, duration and ultimate impact of the pandemic.”

Noting “uncertainty itself was a common theme,” he added the questionnaire gave AM Best a view of how companies operated on a daily basis, and for insurers COVID-19 was a “real-time test of their business continuity plans, and it appears the companies have been able to execute them effectively.” Irwin said the stress tests provide an initial baseline from which AM Best can build. He said AM Best saw no major surprises from the industry responses.

The insurance industry was in a good capital position at year-end 2019 ahead of the COVID-19 pandemic, Ken Johnson, managing director, AM Best, said in the webinar.

Based on the initial results of the stress tests, Johnson said it appears the U.S. and Canadian life and health segments were the most impacted.

Johnson said in total, 75% of “the global rated universe saw no impact in their current BCAR assessment.” He added BCAR is just one component of AM Best's overall balance sheet assessment.

Looking at the U.S. market, Johnson said COVID-19 will be “an earnings headwind” for the property/casualty market as insurers deal with future claims as well as reputational risk while “political pressure continues to mount” in areas such as business interruption.

In the life and annuities segment, the financial impact “will take a few years to play out,” a scenario he said is similar to the financial crisis of 2008.

Stress test results in areas outside the United States—Europe, Middle East and Africa; Asia-Pacific; and Latin America—were “reasonably good” and “probably slightly better” than in the U.S. market, Mahesh Mistry, senior director, AM Best, said in the webinar. This was partly due to the fact the rated companies in these markets included a lower proportion of life and health companies.

Companies in low-risk countries as assessed by Best's Country Risk Tier ratings (CRT-1) had high stress test ratings, while companies in emerging markets saw declines in their BCAR scores (CRT-4 and 5). Following its initial stress test results, AM Best will investigate further and collect more information while refining its BCAR assessments and conducting ongoing surveillance, said Mistry.

 


David Pilla is a news editor, BestWeek. He can be reached at david.pilla@ambest.com.


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