Two global ratings agencies will be stress testing the impact of COVID-19 on life insurers after they gave a negative outlook to the US and UK life market
As the stock market experiences volatility, Fitch and AM Best say life insurers' capital is at risk in the UK and US (Credit: PixaBay)
Market volatility has led ratings agencies to reduce their outlooks on the US and UK life insurance sectors to negative, announcing plans to “stress test” rated insurers to gauge the exposure of each to the impact of COVID-19.
Both AM Best and Fitch Ratings have revised the outlook of the US life insurance market to negative from stable, with Fitch applying the same reduction to the UK.
Both firms also announced they will begin stress-testing the insurers they rate to gauge the potential impact of market disruption caused by COVID-19 on their balance sheets, and by extension on their solvency ratings.
AM Best launched a video update on its website, in which chief rating officer Stefan Holzberger said: “We’ve recently revised our outlook for the [US] life and annuity segment from stable to negative, and this is driven by a number of factors.
“First and foremost are the economic ramifications of the coronavirus and the potential for prolonged negative growth in the US economy, as well as many other markets around the world.”
He added that the agency was also looking into the implications of “interest-sensitive” products and “spread compression” — a decrease in bond yields that occurs when demand increases.
His view is consistent with that of Moody’s Investment Service, which stated in a recent report that lower interest rates will, over time, “hurt every product with an interest rate component” — including life cover, fixed and variable annuities and pension risk transfers.
Fitch managing director of life insurance Douglas L. Meyer reported similar concerns to AM Best.
He said: “Over the near-term, the deterioration in the equity market and decline in interest rates will pressure life insurers’ earnings, reserves and capital.
“Longer term, Fitch expects the potential for a sustained disruption in the broader economy could cause deterioration in the credit markets, which would lead to increased bond and loan defaults and further pressure statutory capital levels.”
Stress testing the impact of COVID-19 on the US insurance market
According to Holzberger, AM Best will be rolling out stress testing “over the coming weeks” to try to determine the possible impact that disruption caused by COVID-19 could have on the US insurance market, and life insurers will be a key focus.
“Out of the three segments, P&C, life and annuity and health, right now the life and annuity carriers are likely to be most severely affected by this pandemic,” he added.
“We’re devising some stress testing, which is an approach we take when we see an unprecedented event like this.
“We did something similar during the financial crisis and more recently during the eurozone financial crisis, which took place a few years later.
“What we mean by stress testing is taking a look at the implications on risk-adjusted capitalisation.
“We’re going to stress test investments and reserve adequacy, as well as other aspects of the risks borne by the insurance companies that we rate.”
While it hasn’t made an announcement on the same level as AM Best, Fitch’s Meyer said the firm will “soon conduct a comprehensive review” of ratings assigned to US life insurers using “updated base and stress case ratings assumptions” to reflect the above pressures caused by COVID-19.
How could the impact of COVID-19 on the UK insurance market differ?
According to Meyer, there could be a more severe impact on the US life insurance market from COVID-19 due to a higher level of mortality risk.
In the Fitch report, he said alongside the knock-on effect of capital market disruption, the disease exposed US life insurers to “a spike in mortality risk”, the severity of which he believes is “highly uncertain” at this point.
By contrast, the firm’s UK-focused report, written by Fitch director Fedor Smolyakov and senior director Willem Loots, said that although UK life insurers were likely to experience the same spikes in mortality exposure, it was “largely reinsured”, especially around “pandemics of this nature”.
The two added that the combination of mortality risk and market volatility caused by COVID-19 will likely create “some pressure on earnings and variability in capital levels”, but that the severity and duration was “impossible at this time to predict”.
AM Best is yet to release its outlook for the UK life insurance market, but Smolyakov and Loots said Fitch will be implementing the same stress-testing procedure for its rated insurers in the UK as it is in the US.