Risk-Based Capital Stress Testing

By Robert Lumia, Senior Vice President, and David Domino, President, U.S. Segments, Guy Carpenter

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. 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, the unemployment rate reached  near an 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.

The Impact for Life & Health Insurance Companies

Whether from increased volatility or near zero interest rates there is little doubt COVID-19 is 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 monitoring these developments 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 simulates aspects of how rating agencies perform stress tests on accident and health company financials. The test looks at the effects the COVID-19 pandemic 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.


In total, we stressed four asset classes to estimate the decreases in value associated with shocks to the economy:

  • 35 percent reduction to common stock
  • 35 percent reduction to real estate
  • 10 percent reduction to mortgages
  • 35 percent reduction to Schedule BA assets.

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:
    • First USD 500 million NAR - 0.0029 per USD 1,000 NAR
    • Next USD 4.5 billion NAR - 0.0005 per USD 1,000 NAR
    • Next USD 20 billion NAR - 0.0004 per USD 1,000 NAR
    • Amount greater than USD 25 billion NAR - 0.0002 per USD 1,000 NAR

As with the asset tests, these stressors represent a reduction to available capital.

Stress Test Results

Guy Carpenter’s model 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.

  • 200 percent - company action level
  • 150 percent - regulatory action level
  • 100 percent - authorized control level
  • 70 percent  - mandatory control level

Our model stressed the financials for a cross section of 100 mid- to large-sized accident and health companies1. Based on the asset and liability stresses, the average RBC ratio declined from 743 percent to 563 percent, a 24 percent drop. Table 1 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.

Peer Company RBC Ratios
While the results of the test show an average 24 percent drop in RBC ratios, companies will have different sensitivities to the test based on their distribution of assets and liabilities. The largest change in ratio for any company was a 58 percent drop.
Change by Company
For the 100 companies included in the sample, the lowest starting RBC ratio was 309 percent. After applying the stressors to the current ratios, 13 percent of the companies had a ratio between 150 percent and 250 percent. Additionally, at the top end of the spectrum, only 40 percent of companies had ratios in excess of 600 percent, compared to a starting point of 62 percent. The following charts show how the distribution changed due to the test.
Current RBC Ratio
Stressed RBC Ratio

What’s Next?

As the world continues to wrestle with the COVID-19 outbreak, medical, economic and societal measures designed to limit the spread of COVID-19 have seen mixed results. Infection and fatality rates are no longer growing quite as fast as they were during March and April; however, many states are still grappling with accelerating infection rates. The stock market has rebounded to levels more consistent with the pre-pandemic environment, but unemployment levels remain alarmingly high. States have gradually relaxed restrictions as a way of restoring normalcy. Opinions vary but there is a general concern that a second wave of the virus could hit later this year.

The RBC ratio stress test demonstrates the impact that sudden shocks, such as a pandemic, can have on a company’s financial health.  These shocks will affect companies in different ways due, in part, to variations in asset and liability mix and risk management strategies. Many companies’ portfolios can withstand the stress to their financials. Others are more susceptible to the pressure. Due to the possibility of another COVID-19 wave (and the continued economic uncertainty that comes with it), companies need to prepare for the resultant impacts. Reinsurance can help strengthen vulnerabilities within company portfolios and provide greater stability in turbulent times. 

Are you ready?


  1. 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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