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). Guy Carpenter’s model, which mirrors aspects of how rating agencies perform stress tests on accident and health company financials, stressed company-level RBC ratios as of December 31, 2019. RBC ratios are calculated as total adjusted capital/authorized control level RBC. When comparing total adjusted capital to authorized control level RBC, the following regulatory actions are triggered if the relationship drops below the corresponding threshold.
Our model stressed the financials for a cross section of 100 mid- to large-sized accident and health companies. Based on the asset and liability stresses, the average RBC ratio declined from 743 percent to 563 percent, a 24 percent drop. The table below shows changes in the mean, median and various percentiles due to the stress test while the corresponding chart provides the distribution of ratios for all companies included in the test.
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.
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