A.M. Best moves to COVID-19 phase 2
Head of Analytics
Senior Consultant Analyst
Earlier this week A.M. Best (“Best”) announced the results of its initial response to COVID-19, reviewing a set of capital adequacy “stress-tests” across its rated universe using its capital model (the “BCAR”).
The agency acknowledges that this review was something of an early “blunt instrument”, but its logic has been to create a complete set of “stressed base-line” BCAR outcomes (along with individual rated firm reviews and responses to the agency’s COVID-19 questionnaire), against which it is now conducting case-specific reviews and seeking more granular information.
We believe that, crucially for the potential for rating actions, this also moves Best’s review process beyond the BCAR and onto the rest of its rating methodology.
Outside of the life sectors in Canada and the US, the BCAR base-line stresses have been generally positive. Most rated (re)insurers have come through it quite well, with manageable “hits” to their BCAR outcomes, and across the rated universe capital remains robust. The other areas where the agency notes that a greater BCAR stress impact has been observed are amongst some smaller insurers and those in CRT-4 and CRT-5 countries.
However much of the risk to ratings may sit outside the “stressed BCAR” even for those whose initial stress-test position was robust. In particular, how the ongoing COVID-19 “event” shines a spotlight on rated (re)insurers’ ERM capabilities and the resilience of business models of different types across the agency’s rated universe.
In common with others, at the industry level so far, Best continues to see COVID-19 as largely an earnings event and not a capital event, albeit with ongoing major uncertainties around loss exposures in some areas of commercial lines. But this is not a benign ratings scenario if a rated (re)insurer has any perceived vulnerability (in the agency’s eyes) across the “operating performance”, “business profile” and “ERM” components of the analysis.
Additionally, both the COVID-19 impact itself, and how (re)insurer leaderships are able to evaluate that impact and work through it, may draw out concerns not previously seen as being material in any of the above three areas by Best. Alternatively, the impact may be to stall an otherwise expected improvement sufficiently to trigger a negative rating or outlook action.
For those (re)insurers whose rating has (or could have) a “lift” or “drag” from a wider parent group, how COVID may impact the group could also be crucial.
As ever, communications with the agency by rated (re)insurers will be most effective if they have an absolute focus on the detail and the logic of the totality of the agency’s methodology, not just on the BCAR model outcome.
*The “BCAR” is the output of A.M. Best’s proprietary capital adequacy model. The acronym also tends to be used for references to the model itself.