Insurers in Australia and the Asia Pacific could withstand an additional fall of 10% in regional equity markets without affecting credit rating, according to an S&P Global Ratings stress test. 

“We believe they would have less financial buffer, but our ratings on them would likely remain intact,” the rating agency says. 

S&P says material market movements in debt and equity markets have scarred the earnings profile of insurance companies in the region, leading to pressures that affect regulatory capital ratios and buffers held to support credit quality. 

“Negative rating pressures emerge where such movements are sustained and unable to be offset. However, equity markets can move quickly and, at times, materially,” the rating agency says.  

“For now, insurers appear well equipped to contend with some moderate equity market volatility. 

“About half of rated insurers across Asia-Pacific hold a level of capital within 10% of the capital adequacy required to support the credit rating.”

The rating agency says the first line of defence for insurance companies is an ability to fully absorb the stress from ongoing operations, with minimal impact on the financial strength rating. 

And in terms of country-specific stress, all companies tested had sufficient financial resources – albeit with reduced flexibility. 

“We base this on our one year of forecast income supplemented with expected capital buffer retained,” the rating agency said. 

S&P used it capital model to identify rated insurance companies whose capital adequacy buffer, or credit ratings, would be at risk if equity markets slumped. 

“The review sought to focus on the insurers most exposed to equity movements,” S&P says. “That is, where we saw a potential impact on the credit rating – absent any action from management.” 

The stress test was based on a one-off decline of 10% in the equity index; more onerous country-specific stress; and a reverse stress examination.