Global insurers perform well in AM Best stress tests, Canadian lifecos struggle

By Kate McCaffery | May 20 2020 01:30PM

Globally, the insurance industry is well capitalized with most rated insurers covered by the A.M. Best performing well in stress testing the ratings agency undertook recently to gauge the immediate implications of the COVID-19 pandemic on insurers’ financial strength.

The report, Stress Testing Rated Companies for COVID-19, released May 18, found that property and casualty insurers in the United States and Canada performed relatively well compared with life, annuity and health insurers. A.M. Best adds that most companies in the Asia-Pacific generally performed well, as did those in Europe, the Middle East, Africa and Latin America.  “Insurers operating in domiciles in the higher country risk tiers were more vulnerable,” they write.  “Most regions were able to easily withstand the stress test – the exception being the U.S. and Canada life and health composite.”

The Best’s Capital Adequacy Ratio (BCAR) baseline stress test addresses a number of risk factors, and examines investment and underwriting shocks to company balance sheets, with adjustments or “haircuts” made to insurer’s available capital, investments and underwriting. The BCAR assessments of approximately 85 per cent of A.M. Best’s rated population are currently at the company’s “strongest” level.  “The impact was greater for life annuity insurers with high asset and mortality risks, insurers with material exposures to mortgage loans, those operating in domiciles in higher country risk tiers, and some small companies with smaller capital buffers,” say the report’s authors.

“Although the total number of rating units assessed below “adequate” is low, the actual volume increased around three-fold, the majority of which was driven by the U.S. and Canadian life and health market – which, perhaps as expected given its asset focus, would see the greatest impact from the stress tests.”

U.S. and Canadian property and casualty companies saw no change in their BCAR assessments when tested. That said, the report warns that moves to pay uncovered business interruption claims by some companies could in turn damage other insurers that adhere to contract language. “If governments and legislatures are successful in forcing insurers to retroactively apply cover for losses from COVID-19 related business interruptions, despite specific exclusions in their policies, these considerations would have grave impacts for the industry.”

Life and health insurance companies did not perform as well in the stress test compared to their property and casualty counterparts. BCAR results were more volatile, with the median BCAR score dropping 19 points in response to the testing.

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