OLDWICK: Global rating agency, AM Best has revised its market segment outlook on Canada’s life insurance industry to negative, owing to the significant disruption to the financial markets caused by the outbreak of COVID-19.

Concurrently, AM Best is maintaining its stable outlook on Canada’s property/casualty industry.

In its Best’s Market Segment Report on Canada’s life insurance market outlook, AM Best states that although most of Canada’s life/annuity insurers maintain strong balance sheets and likely will be able to absorb regulatory capital changes resulting from volatility in the global financial markets, their near-term operating performance will be affected negatively.

The following factors led to the revised outlook:

Expectations of a significant contraction in the global economy, which is likely to challenge the top line growth of Canada’s life insurers and suppress spread- and fee-driven income. This will have a muted impact on fee income in the event of a V-shaped recovery in the equity markets and a more severe impact in the event of a prolonged depressed equity market; and

The rising likelihood of a prolonged low interest rate environment, along with the sharp decline in oil and gas prices and a drop in demand in the hotel/lodging, transportation and travel sectors, likely will exacerbate the negative impact on Canada’s economy and may result in an increase in credit defaults in weaker, more debt-heavy companies.

The change in outlook does not necessarily correlate to an increase in negative rating actions by AM Best; rather, it anticipates headwinds to the operating performance metrics of Canada’s insurers. Over the past decade, Canadian companies have stress-tested multiple pandemic scenarios using better data and modeling techniques, which has placed them in solid positions to manage this risk, and they are generally well-prepared to quantify the impact in their financial metrics.

The stable outlook on Canada’s property/casualty industry is being maintained based on the segment’s solid risk-adjusted capital and increasingly sophisticated underwriting and distribution capabilities and enterprise risk management practices. AM Best will continue to monitor its market segment outlooks on major insurance industry segments and individual lines of business, and make updates or revisions related to the COVID-19 outbreak as warranted.