As companies continue to navigate the repercussions of the COVID-19 pandemic, 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, according to Robert Lumia, Senior Vice President, and David Domino, President, U.S. Segments, Guy Carpenter. This article provides readers insights into how the current environment has impacted capital levels and how rating agencies may view a company’s ability to withstand market volatility.
How Did We Get Here?
Let’s take a moment and go back to February. Unemployment rates were less than 4 percent in the United States. 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 U.S. economy was strong and tracking favorably. As we progressed into early March, 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 and the unemployment rate reached a near all-time high. Now, the nation is consumed with a sense of uncertainty. While asset values have returned, market volatility reminds us that the fragile U.S. and world economies are still dealing with the negative impact of the pandemic.