The Impact for Life & Health Insurance Companies
COVID-19 is likely having an impact on insurance company capital. Companies are closely monitoring potential decreases in assets as well as liability changes in an effort to protect their capital and surplus positions. Rating agencies are also monitoring these developments to try to identify companies whose financial stability may be particularly vulnerable. Specifically, rating agencies are subjecting carrier assets and liabilities to stressed scenarios as a way of evaluating the strength of their financial health.
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 risk-based capital (RBC) ratios based on stresses to both assets and liabilities.
In total, we stressed four asset classes to estimate the decreases in value associated with shocks to the economy:
All stresses are tax-affected and represent a reduction to available capital.
To model the potential impact on morbidity and mortality for accident and health carriers, we stressed liabilities as follows:
• Additional losses for health lines of business equivalent to 5 percent of net premium written (on a tax-affected basis). Premiums for dental, vision and specified disease were excluded from the stress test.
• Elevated group life losses were estimated by applying the following factors to net amount at risk (NAR) levels:
As with the asset tests, these stressors represent a reduction to available capital.
Note on stress test limitations:
The overall calculations are based on a random sample of companies. There could be unintended biases in the selection, and the overall results could change based on another sampling. The liabilities that were stressed focused on accident & health type premiums and group life exposures. Liabilities such as individual life, annuities, etc. are not included; as such, this is a partial view.