Insurers have ‘adequate buffer’ of capital to withstand pandemic shocks says credit rating agency

US-based credit rating agency AM Best believes that most insurers have an “adequate buffer” of capital to protect them against any financial shocks related to the Covid-19 pandemic.

The agency’s latest report, Best’s Special Report: Stress Testing Rated Companies for Covid-19, found that financial sensitivity to the coronavirus crisis was greater for life and health insurers with high asset and mortality risks, as well as insurers with material exposures to mortgage loans, carriers operating in domiciles in higher country-risk tiers and companies with smaller capital bases.

The report used stress test analysis to gauge the preliminary impact of Covid-19 on AM Best’s rated insurance companies, focusing on underwriting and assets. Covering 1,400 rating units worldwide, the results showed that the median Best’s Capital Adequacy Ratio (BCAR) score at value at risk (VaR) 99.6 of the rated population declined to 43% from an estimated 2019 year-end BCAR of 49%, demonstrating the resilience of the insurance industry.

AM Best added that property and casualty insurers in the US and Canada have performed relatively well compared to life, annuity and health insurers.

However, the agency said that businesses that have performed well in its initial stress testing could still face credit rating pressure if conditions deteriorate beyond the prescribed scenarios.

This could include:

• A second wave of mortality losses arising from a resurgence of the pandemic.
• A significant spike in claims for commercial lines segments, such as event cancellation, business interruption or trade credit insurance.
• Rulings on contract clauses, results of litigation and government decisions.
• Further deterioration of financial markets resulting in material investment losses or write downs of assets.

Mahesh Mistry, senior director at AM Best, said: “Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation.

“Reputational risk in certain markets may also be a problem, as any legal disputes become more visible to consumers, policyholders, regulators and legislators.”