The Covid-19 pandemic will hit insurers’ earnings but capital levels are strong enough to withstand the crisis, according to stress-test analysis from AM Best.
The ratings agency said the financial strength of insurers would buffer shocks to balance sheets. It added that some insurers – such as those in the life and health sector, with exposure to mortgage loans or carriers operating in higher country-risk tiers – are more at risk.
In analysis of stress tests on 1,400 rated entities, AM Best said its capital adequacy ratio score of the industry declined to 43% from an estimated 49% at year-end 2019.
“Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalisation,” said Mahesh Mistry, senior director at AM Best Rating Services. “Reputational risk in certain markets may also be a problem, as any legal disputes become more visible to consumers, policyholders, regulators and legislators.”
AM Best’s stress-test exercise did not account for the potential of contracts being voided. The ratings agency said should pandemic scenarios change, including rulings on BI and other contract clauses, insurers could face greater pressure on financial strength ratings. Other scenarios include a second wave of mortality losses, a spike in claims for commercial lines for event cancellation, BI or trade credit, and further deterioration of financial markets.
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