The banking failure emphasises the importance of a robust risk management structure, especially for annuity writers

Despite US insurance companies’ minimal exposure to bonds issued by the now-shuttered Silicon Valley Bank (SVB), the failure highlights for insurers the importance of managing enterprise, asset-liability and liquidity risks, according to an AM Best.

The commentary notes that had the US government not stepped in to make all depositors whole, underwriters of directors and officers insurance for startups and venture capitalists, as well as the financial institution insureds supporting such entities, could have faced financial distress given that they are operating on very thin capital.

“Since startups are by nature much more agile and less risk-averse than other companies, their directors and officers often make decisions quickly,” said David Blades, associate director, industry research and analytics, AM Best.

“Therefore, the potential for D&O claims for startups would have been high in the case government had decided not to help the depositors.”

Robust risk management essential

According to the rating agency, just eight US insurers have bond exposures greater than 2% of their capital and surplus, with the maximum being less than 5%. Whether these bonds will become impaired remains to be seen.

The ramifications for equity portfolios could be more significant, according to the commentary, as some major bank stocks already have lost significant value.

Five US insurers have equity exposures concentrated in the broader bank and trust sector greater than their capital, and 17 have exposures totaling at least half their capital.

“Many insurers depend on banks for operational aspects, but generally are not as vulnerable to bank run-on scenarios, although they can occur as we’ve seen in the past and emphasise the importance of a robust risk management structure, especially for annuity writers in a rising interest rate environment,” said Jason Hopper, associate director, industry research and analytics, AM Best.

“Insurers that conduct detailed analysis on the impact of rising interest rates on their asset-liability portfolios and manage their impacts through capital and other risk management tools will fare better in those events than those that are less well-managed.”

SVB catered primarily to higher-risk tech startups, which have been hurt by higher interest rates and dwindling venture capital. As interest rates rose the past year, financially strapped venture capital firms found it more difficult to access funding, and many pulled their deposits from the bank.