Standard & Poor’s (S&P) continues to refresh its asset stress test, which reflects real-time insights on rating migration and default risk. The reinsurance, property & casualty (P&C) and life teams all conducted asset stress tests as the markets were starting to show dislocation in late February, as well as in mid-March, when the equity market was close to its recent low point.
Generally, S&P derives its assumptions from internal research conducted on ratings transitions and stresses observed during previous financial crises. The asset stress tests show that the sector’s capital buffers remain resilient, with 86 percent of companies still at a strong, very strong or excellent level after the stress test. S&P also compares the assumptions in its stress test against the capital adequacy calculations contained in its capital models.
For its part, A.M. Best elected to triage the (re)insurance industry using a simple, easy-to-model solvency test across all ratings issued globally, and despite limitations on the level of information available on insurance companies, A.M. Best uses a very high-level test to measure a one-scenario impact on the industry. Like S&P, A.M. Best responded in a measured way to COVID-19, and only changed its outlook on the life and annuity sector to negative.
While there are early signs of a stock market recovery in the United States, it is too early to declare victory. There is significant uncertainty around the timing and shape of the recovery. In times as challenging as these, companies need to demonstrate their capital strength, liquidity management, earnings prospects and risk management to the rating agencies.
Guy Carpenter is well equipped to work with companies to address the ratings-related repercussions of the COVID-19 pandemic. From advising on how to structure capital needs to running stress test exercises to measure the impact to carriers’ capital and liquidity under several difficult scenarios, we are here to help companies position themselves positively in the view of rating agencies, during and after the current pandemic.