As companies continue to navigate the repercussions of COVID-19, it is important that they understand the pandemic’s impact on risk-based capital (RBC). Insurers are dealing with COVID-19’s effects on assets and liabilities, both of which can affect capital levels.
How Did We Get Here?
Back in February, unemployment rates were less than 4 percent. The quarterly gross domestic product (GDP) was growing at somewhere between 2 percent and 4 percent. The S&P 500 was closing in on 3,400. The economy was strong and tracking favorably. As we progressed into early March, the medical impacts of COVID–19 started to spread among certain portions of the U.S. population. In response to the rapid growth in COVID-19 infection rates, state and federal governments took drastic measures to try to dampen exposures and slow the spread of the virus. The resulting shock to the economy was crippling. Asset values dropped, unemployment is near an all-time high and the nation is consumed with a sense of uncertainty. February seems like a long time ago, and a new recession is now upon us.
Risk-Based Capital Stress Test
Guy Carpenter has developed a model that mirrors aspects of how rating agencies perform stress tests on accident and health company financials. The test looks at the effects COVID-19 has on the marketplace and provides benchmark comparisons of company capital levels by estimating changes to company-level RBC ratios based on stresses to both assets and liabilities.