Although AM Best believes property/casualty insurers won’t be as severely impacted by the COVID-19 pandemic as life and annuity players, the rating agency said yesterday that it will be stress-testing the balance sheets of all rated insurers.

“We’re taking a look at the implications on risk-adjusted capitalization, we’re going to stress-test investments, we’re going to stress-test reserve adequacy, as well as other aspects of the risks borne by the insurance companies that we rate,” said Stefan Holzberger, senior managing director and chief rating officer, in a video posted on the AM Best website to explain the rating agency announcement.

Holzberger noted that AM Best performed similar tests during the 2008-2009 financial crisis and the Eurozone crisis. Noting that the financial crisis “was for many companies in the insurance industry more of a liquidity event,” Holzberger said that besides looking at risk-adjusted capitalization on a stressed basis, rating agency analysts will examine access to liquidity and the timing of debt securities in the capital structure.

James Gillard, AM Best executive vice president and chief operating officer, noted that the rating agency will be issuing a special questionnaire asking companies how they are handling the pandemic crisis: “What are they seeing in their operations? What changes [are they making] to their forecasts? What lines do they see most hit? Their assumptions? And what kind of stress-testing are they doing with their own business operations?”

To ease the burden of responding to the new questionnaire and to various regulatory calls for information related to the pandemic, AM Best will move its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ) to May 1, 2020 from April 1 for all rated companies that don’t have a rating due in March or April, he said.

“There may be exclusions, but there may very well be different interpretations around those exclusions in the U.S. and elsewhere. So, that’s something we’re going to be monitoring very closely.”

Stefan Holzberger

Giving some preliminary answers to one of the questions that Gillard listed—about what lines will be impacted on the P/C side—Holzberger noted some uncertainty with respect to business interruption coverage. “There may be exclusions, but there may very well be different interpretations around those exclusions in the U.S. and elsewhere. So, that’s something we’re going to be monitoring very closely,” he said, noting that the most likely impacted lines are travel and trade credit insurance.

“Most of the companies on the P/C side we feel are well protected,” Holzberger said, referring to core personal, commercial and reinsurance segments. “Those main lines of business are probably going to be more indirectly affected by the pandemic. Couple that with the fact that really all segments of the market are quite well capitalized…with ample liquidity, [and] we feel companies are well positioned to handle a certain level of severity.”

“But, really the ultimate ramifications are just certainly uncertain at this point,” he said.

Also noting that economic pain for non-insurers will dampen the investment performance of insurers generally, since they are major participants in investment markets, he added that a very prolonged recessionary environment would be a strain on insurers in all three sectors.

“We’re monitoring very carefully, but we do feel out of the three segments—property/casualty, life and annuity, and health—[that] right now, the life and annuity carriers are likely to be the most severely affected by this pandemic,” he said.

Earlier this week, AM Best revised the life/annuity segment outlook to negative from stable, noting the impacts of the global economic slowdown and the impacts of yield declines on interest-sensitive products.

Holzberger noted that life and annuity companies have heeded lessons of the 2008-2009 financial crisis with improvement to asset-liability management and prioritizing access to liquidity. “But these are unprecedented events. The economic downturn—what we’ve seen so far—is severe, and there’s really no knowing how much further that might transgress,” he said.

Topics Carriers AM Best Property Casualty COVID-19