SVB failure: AM Best highlights importance of stress testing against rising interest rates

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13th March 2023 - Author: Luke Gallin

Although insurers’ vulnerability to nan banking assemblage extends beyond banal impacts, providers of life security are little susceptible to nan benignant of short-term volatility seen pinch nan nonaccomplishment of Silicon Valley Bank (SVB), according to AM Best.

svb-logo-newThe ratings agency reports that, based connected year-end 2021 data, conscionable 8 companies person enslaved vulnerability to SVB greater than 2% of their superior and surplus, pinch nan maximum being little than 5%.

More broadly crossed nan banking and spot sector, 5 insurers person equity vulnerability greater than their superior position, and 20 person vulnerability totalling astatine slightest half of their capital.

SVB, which was nan preferred slope for nan exertion sector, saw a emergence successful request for its services passim nan pandemic, pinch galore firms utilizing nan slope to clasp rate for payroll and different business expenses. As nan deposits grew, SVB invested a ample portion, which is emblematic for banks.

As wide reported successful nan mainstream media, nan rumor began erstwhile SVB invested heavy successful long-dated U.S. authorities bonds, including those backed by mortgages. While these bonds were perceived to beryllium safe, nan accelerated emergence successful interests rates by nan Federal Reserve to tackle inflation, saw nan prices of these bonds fall, successful move starring to a important driblet successful worth of SVB’s enslaved portfolio.

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The bank’s customers began drafting connected their deposits and SVB didn’t person capable rate connected hand, truthful it started trading immoderate of nan bonds astatine ample losses, which successful move spooked investors and customers, yet starring to nan illness of nan slope connected March 10th, 2023.

“SVB’s failure, on pinch nan caller shutdown of Silvergate Bank, has caused a daze to a number of stocks successful nan banking sector. As we person already seen, immoderate awesome slope stocks person mislaid important value,” said Sridhar Manyem, elder director, manufacture investigation and analytics, AM Best.

“Insurer vulnerability to nan banking assemblage extends beyond banal value impacts though arsenic galore insurers dangle connected banks for lines of credit, distribution, hedges and different operational aspects. However, life insurers are not arsenic susceptible to short-term volatility and a run-on-the-bank script that we saw pinch SVB, aliases banks successful general,” added Manyem.

According to nan ratings agency, examples specified arsenic Equitable Life successful nan UK successful 2001, General American successful 1999, and Executive Life successful 1991 show that nan anticipation does exist, and underlines nan value of ERM successful general, and liquidity consequence guidance successful particular.

“Investment managers are navigating an liking complaint situation that has not been seen successful decades, and lessons from nan past tin thief insulate from early mistakes.

“Stress testing and script study of nan effect of rising liking rates connected asset-liability guidance and proactive guidance of these stresses done strategical actions and superior guidance would beryllium considered favorably for insurers pinch liking delicate exposures,” said Manyem.

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