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Jun 2020

Life insurers should stress test economic risk of pandemics

Source: Middle East Insurance Review | Mar 2020

The 2019 novel coronavirus is a timely reminder for life insurers to stress test their balance sheets in the event of a pandemic outbreak.
 
AM Best senior research analyst George Hansen told Asia Insurance Review that having a robust enterprise risk management process, which includes performing several levels of stress tests, would ensure insurers are well prepared to deal with disease outbreaks such as the one being witnessed at present.
 
“Companies running very extreme stress tests that may reduce capital below regulatory levels are better able to deal with pandemics, because at least they know the impact and can address issues much earlier,” he said.
 
Insurers routinely perform stress tests as part of their own risk solvency assessments (ORSA) as required by regulators. For life insurers, the test typically applies to morbidity and mortality risks, as well as other forms of risk such as credit or interest rates.
 
Regulatory filings show that companies typically stress test mortality by assuming extra numbers of deaths per 1,000 people for one to two years, before adjusting to normal levels of mortality. Others may run several types of mortality stresses with weights assigned based on their expected probability, said Mr Hansen.
 
“These mortality tests tend to produce results showing fairly modest declines in earnings, but life companies can generally withstand this stress,” he said.
 
However, he added that insurers should also test the economic and operational risk of pandemics by combining the impact of a contraction in GDP with increases in mortality and morbidity.
 
“We would like to see more companies model GDP stresses, as these seem to accompany most outbreaks, at least on a short-term basis.”
 
Economic risk
Several analysts and economists have downgraded China’s GDP forecast for 2020 due to the coronavirus outbreak.
 
Citi’s economists are expecting China’s full-year growth to slow from their previous forecast of 5.8% to 5.5%, while the Economist Intelligence Unit said the outbreak could reduce the country’s GDP growth by 0.5 to 1 percentage point from its baseline forecast of 5.9% if the outbreak develops into an epidemic comparable to SARS.
 
While the 2019 novel coronavirus has an eerie resemblance to the experience of SARS, the world is quite different today from 17 years ago. Economies are much more interconnected as companies build supply chains that cut across national borders.    
 
Hence the economic fallout would be felt well beyond China with Euler Hermes recently revising down its global trade growth forecast for 2020 by 0.5 percentage point to 1.3%. The trade credit insurer identified Hong Kong, the US, Japan, South Korea and Germany as being the most exposed to potential losses of exports of goods and services to China. M 
 
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