In light of the unique events surrounding the COVID-19 virus AM Best announced that they will develop stress testing on all rated companies to gauge the impact on risk adjusted capital levels, investment portfolios, reserve adequacy, and other risks borne by all rated entities. AM Best is devising an additional questionnaire to capture more information to assess the potential impact from this pandemic.
The insurance industry is well capitalized and able to persevere market down turns better than the 2008 financial crisis, which was more focused on liquidity concerns. This event is different and the economic fallout and potential for prolonged negative growth for the US and the world will have effects on financial projections and business plans going forward. The stress test will look at the implication of the ongoing decline in interest rates, as well as laddering and maturing of debt investments within the capital structure. Access to liquidity will also be probed as companies may have to access capital if their risk adjusted capitalization weakens. Stress testing on reserve adequacy on lines of business that may be hit the hardest will also be evaluated.
AM Best will also want to understand how companies are handling the crisis operationally and if there are any changes to their financial forecast going forward. Lines of business that will be affected the most and internal stress testing companies are performing in order to evaluate the possible effects to capital adequacy will also be questioned. Companies with well-developed internal stress testing procedures and clear operational plans of action in place will be able to show the validity of their enterprise risk management functions as this pandemic is putting management to the test.
As a result of this difficult time, and because companies are being asked for additional information, AM Best will delay by one month the deadline for the 2019 statement year SRQ to May 1, 2020 for companies that do not have a rating due between March and April. As a result of this additional information received and stress testing performed, AM Best will be publishing further commentary and research on the analysis over the near term.
The BMS Re Capital Management team is here to assist with any questions regarding the additional questionnaire.
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Nick Dranchak
Executive Vice President – Philadelphia
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