The SVB Collapse Has Important Lessons For The Insurance Industry, According to AM Best
worldinnews.com - The bankruptcy of SVB highlights the necessity of insurance companies dealing with the risk of enterprise, liability and liquidity, according to a commentary by AM Best.
The Best's Commentary, titled "SVB Collapse Highlights Critical Lessons for the Insurance Industry," stated that only eight American insurers have bond exposures greater than 2% of their capital and surplus, the maximum being less than 5%.
Whether these bonds are impaired is still unknown, AM Best said. The effects on equity portfolios may be more profound, the commentary explains, because some of the larger bank stocks have already suffered significant declines. Five U.S. insurance companies have equity investments in the banking and trust sector that are larger than their capital, and 17 have investments that total at least 50% of their capital.
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Many insurance companies have banks as part of their operational infrastructure, but are not as susceptible to a bank run as other businesses, although this has happened in the past and emphasizes the importance of a strong risk management system for annuities writers in an interest rate increase environment, said Jason Hopper, associate director of industry research and analytics at AM Best. Insurance companies that conduct in-depth studies of the effects of increased interest rates on their asset-liability portfolios and mitigate these effects through capital and other risk management tools will have a greater chance of success during these events than companies that have a weaker risk management strategy.
SVB's primary focus was on higher-risk tech startups, the report said these startups had been affected by rising interest rates and a smaller funding base, AM Best noted. As rates on bank loans increased over the past year, venture capitalists became less inclined to access capital, and many withdrew their funds from the bank.
Had the U.S. government not intervened to make all depositors whole, the insurance companies that underwrite directors and officers insurance for venture capitalists, as well as the institutions that are insured, would have had a financial hardship, as their capital is thin, said AM Best.
Since startups are inherently more agile and less risk-averse than other organizations, their directors and officers often make quick decisions, said David Blades, associate director of research and analytics at AM Best. As a result, the potential for D&O claims for startups would have been high if the government had instead failed to assist the depositors.
