A.M. Best's Commentary

With Covid-19 Outbreak, Life/Health Insurers Get Real World Test of Enterprise Risk Management Programs

Will ‘pandemic scenario’ preparations, installed after 2007 crisis, work?

OLDWICK, N.J., March 31, 2020—AM Best believes insurers have done well in implementing improved enterprise risk management (ERM) controls since the financial crisis a decade ago, but until the COVID-19 virus outbreak, these changes have not faced a significant test.

A new Best’s Commentary, titled, “Life/Health Insurers Get Real World Test of ERM Programs,” states that most, if not all, life and health insurers include a pandemic scenario in their testing. Therefore, AM Best expects insurers to proceed with clear and actionable plans during the current crisis. AM Best’s rating methodology focuses on the ERM framework and overall risk capabilities relative to a company’s risk profile. Companies with sound ERM practices that are executing strategies effectively within stated tolerances will preserve, if not build up, balance sheet strength and perform successfully over the long term.

Companies Will Feel Some Pain

Nevertheless, the commentary states that companies still will experience some pain along the way, as companies cannot operate effectively by simply managing to worst-case scenarios. However, AM Best’s view is that the majority of the life industry already was in a position to absorb the downturn in the economy, although it will have to contend with serious earnings headwinds from the impact of low interest rates and declining sales in the near to medium term. Additionally, some companies, whether owing to weaker ERM programs, lower risk-adjusted capital, or product or investment concentrations, will not perform well during this crisis and potentially may face rating downgrades. AM Best has spoken at least once with each of its rated entities, and they all have indicated that their contingency plans are operative and consider a significant level of remote workers.

the majority of the life industry already was in a position to absorb the downturn in the economy, although it will have to contend with serious earnings headwinds from the impact of low interest rates and declining sales in the near to medium term....

As for health insurers, an uptick in the loss ratio is likely, with the full impact being based on the spread of COVID-19, as well as the negative impact on premiums owing to layoffs and financial hardship. However, favorable earnings over the past few years have resulted in strengthened risk-adjusted capitalization for health insurers, which should help offset some of the financial impact. In addition, most health insurers’ rates are set annually, with rates adjusted at renewal, so the financial impact may be limited to 2020.

To access the full copy of this commentary, please visit ambest.com.

 

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.