COVID-19 Stress Test Finds Most Insurers' Capital Levels Adequate

Initial stress testing conducted to gauge the COVID-19 pandemic's preliminary impact on insurance companies' financial strength found that most insurers' capital levels provide an adequate buffer against potential balance sheet shocks, according to A.M. Best.

In a new special report, "Stress Testing Rated Companies for COVID-19," the rating agency discussed the analysis of approximately 1,400 rated insurers worldwide, focusing on the impact of COVID-19 on insurers' underwriting and assets.

Best said that given the evolving nature of the COVID-19 risk, the direct and indirect impact of the pandemic on life and non-life insurers may differ.

The baseline stress test addressed a number of risk factors and considered the impact of both investment and underwriting shock on the balance sheet, Best said, with adjustments made to insurers' available capital, investments, and underwriting. "The results of our stress test confirm that, globally, the insurance market is well capitalized, with most rated (re)insurers performing well in the stress test," Best's report said.

The rating agency said the property-casualty insurers in the United States and Canada performed relatively well compared with life/annuity and US health insurers. Most companies in the Asia-Pacific region also generally performed well, Best said, as did those in Europe, the Middle East, and Africa, and in Latin America.

Before conducting the stress tests, A.M. Best solicited information from companies through a COVID-19 questionnaire. The questionnaire sought information on the impact of the pandemic on the company's operations and financial position, any pandemic risk stress test scenarios the company had previously modeled and whether the current or anticipated impact remains within risk appetite and tolerance, any planned adjustments to 2020 financial projections, an update on any changes the company has made to product assumptions, internal stress testing, and scenario or sensitivity analysis.

Information from the questionnaire, along with the stress test, "allows for a better picture of insurers' sensitivities in the current environment, given the considerable uncertainty about the potential evolution, duration, and ultimate impact of the pandemic," Best said. "In light of such uncertainty, as well as the rising levels of economic and financial risks globally, we moved many of our market segment outlooks to Negative from Stable."