A.M. Best has revealed it is developing stress testing to conduct on its rated insurance companies’ balance sheets.
The stress testing will gauge the impact of the COVID-19 virus fallout on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities, according to A.M. Best.
The rating firm explained that COVID-19 is unique in its scope and complexity of potential losses, and the uncertainty regarding the near-term impacts further exacerbates the situation.
It added that the direct and indirect effects of the outbreak may not be understood fully for some time.
Similar stress testing was conducted following previous then-unprecedented events, such as the September 11 attacks in 2001 in New York and the Eurozone crisis in 2008.
A.M. Best suggested that the insurance industry is more resilient today to a financial market downturn than it was during the 2008 to 2009 financial crisis, which put heavy attention on liquidity risk.
The rating company said: “At this time, rated companies are expected to be able to meet their commitments, despite the rapidly evolving situation. With these coming stress tests, access to liquidity, as well as the laddering and maturing of debt securities within the capital structures of insurance companies, will be additional areas of focus.”
It added: “A questionnaire also will be issued to rated entities 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.”
Additionally, A.M. Best will seek results of each organisation’s own stress tests, which are typically considered in the assessment of each rating unit’s enterprise risk management framework.
