Stress Test Suggests Insurers Can Withstand Pandemic

By Martin Croucher
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Law360, London (May 19, 2020, 1:41 PM BST) -- Insurers have sufficient cash to withstand a major financial shock from the coronavirus pandemic, ratings agency AM Best said after it carried out a global stress test on the adequacy of capital reserves.

The company said Monday that the crisis was likely to have an impact on insurers' earnings for the year. But they will not burn through their accumulated capital unless the situation dramatically deteriorates.

AM Best launched the stress test in March, examining the underwriting exposures and investment portfolios of more than 1,400 "rating units" — insurance companies and their affiliated legal entities.

It found the worst-affected companies were likely to be those with smaller capital bases, as well as life insurers with greater exposures to mortality risks.

"Insurers are likely to see a significant hit to earnings in 2020, rather than a material decline in risk-adjusted capitalization," Mahesh Mistry, senior director at AM Best Rating Services, said.

Insurers could face damage to their reputation because "legal disputes become more visible to consumers, policyholders, regulators and legislators," Mistry warned.

AM Best carried out the stress test by sending questionnaires to its rated companies. The agency said that COVID-19 is a fast-moving situation and that the companies that performed well in the test could still face rating downgrades "if conditions deteriorate beyond the prescribed scenarios."

Developments that could affect ratings include a second wave of deaths from a resurgence of the pandemic or a sudden surge in claims from business interruption or trade credit. Insurers could also be hit by "rulings on contract clauses, results of litigation and government decisions," AM Best said.

The Financial Conduct Authority will take a handful of policy wordings to the High Court in July to get a legally binding judgment over insurers' liability.

Hiscox said it will pay out up to $175 million just on event cancellation and travel insurance, but has so far denied liability over its business interruption policies. The insurer said it will face potential exposures of £10 million to £250 million solely from claims for interrupted business if it is found liable.

--Editing by Ed Harris.

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