Let’s Talk Risk: Insurers In A Good Place … For Now

By John Hilton

An extended COVID-19 pandemic crisis leading to a global economic recession is going to hurt insurers' financial health.

How bad insurers will be hurt is something to monitor. A new assessment of insurers' financial strength ratings by DBRS Morningstar finds that capitalization will be the first area of impact. Insurers are going to lose the flexibility that comes with a strong capital cushion, the report concluded.

Looking forward, there will be greater pressure to restore the capitalization building block, as well as an insurers' ability to remedy any significant deterioration within a reasonable time, said Hema Singh, vice president from the DBRS Morningstar Global Financial Institutions team.

“Companies with low levels of capital buffers and significant exposure to equity market volatility through their asset portfolio or product portfolios offerings could see their solvency position deteriorate quickly during the coronavirus pandemic," she said.

Smaller insurers, in particular, could fit this profile, Singh told InsuranceNewsNet.

"I think if things go really bad, really quickly, the smaller insurers will suffer," she said.

Still, other negative factors such as low interest rates, are nothing new for insurers. Rates have been low almost continuously since the 2008-09 collapse of the economy. Insurers are smarter and stronger for having survived that experience, Singh said. Many carriers carry a suitably diverse portfolio light on equities, and have products lines with natural hedges.

"They’re more prepared, but that’s not to say they’re not going to have losses," Singh said. "But I think for the most part, they’re prepared to handle this."

Five Blocks Of Financial Health

DBRS Morningstar's rating assessments are based on "the long-term prospects of life insurers, reflecting the long-term nature of their liabilities," the report said. A risk assessment looks at five blocks: franchise strength, risk profile, earnings ability, liquidity and capitalization.

The short-term impact of the pandemic economy is in the capitalization block, with further stresses on insurers' risk profiles. But as the recession deepens, other blocks could be threatened and downgraded, report authors said.

"Negative rating implications for an individual insurer would likely develop based on the combination of a material decline of a few factors ... rather than a single factor," the report said. "The building blocks are interconnected, so a change in one rating factor in one building block could also lead to a change in another building block.

"Looking forward, there will be greater pressure to restore the capitalization building block, as well as an insurers' ability to remedy any significant deterioration within a reasonable time."

In regards to the pandemic itself, high mortality rates will have an obvious impact on finances as well. Most insurers are taking advantage of the natural hedging provided by offering life insurance and annuities, Singh noted. Otherwise, insurers with big books of long-term care insurance would likely emerge in good shape from a high mortality rate.

"I think they’ll adjust because they know how to adjust," Singh said of insurers in general. "It’ll take them a couple of months. The ones that are more diversified in their investment portfolio will do well. But it also depends on how well the credit markets hold up."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.