Rating agency AM Best has revealed that it is in the process of developing stress testing that it will use to gauge the impact of the coronavirus (COVID-19) outbreak on its rated reinsurance companies.
The tests will aim to measure the effect of the pandemic on reinsurers’ balance sheets, including on risk-adjusted capital levels, investment portfolios, reserve adequacy and other areas.
AM Best considers COVID-19 to be “unique in its scope and the complexity of potential losses,” and has already downgraded its outlook for the US life/annuity market.
Other rating agencies have also begun to issue downgrades to a range of reinsurance sectors in anticipation of the huge economic implications of the virus, as well as the large claims that could stem from it.
AM Best acknowledged that the direct and indirect effects of the outbreak may not be understood fully for some time, but noted that it has previously conducted stress tests for unprecedented events, such as September 11th or the Eurozone crisis.
Analysts do, however, believe the insurance industry today is more resilient to financial market downturns than it has been at other points in recent history, such as during the 2008-2009 financial crisis, which put heavy attention on liquidity risk.
At this time, rated companies are expected to be able to meet their commitments, despite the rapidly evolving situation.
That said, AM Best maintains that its coming stress tests will focus particular attention on access to liquidity, as well as the laddering and maturing of debt securities within the capital structures of insurance companies.
In recognition of the operational disruption caused by the virus, the rating agency has decided to delay by one month its deadline for the 2019 statement-year Supplemental Rating Questionnaire (SRQ).
It also plans to issue a questionnaire to re/insurers to determine how their operations have been affected by the pandemic, which lines of business they expect to be negatively impacted most or if they expect any overall assumptions or forecasts to change.
In addition, AM Best will seek results of each organization’s own stress tests, which are typically considered in the assessment of each unit’s enterprise risk management framework.