US life insurers would see 15% decline in RBC ratios under severe credit migration stress

Written by Adam Cadle

07/10/2019

The US life insurance industry is well capitalised with a median RBC ratio of 447%, however, applying a rating migration stress lowers the median RBC ratio by 69 points (15% decline), to 378%, according to Moody’s Investors Service.

Although insurance companies would still remain well capitalised relative to regulatory requirements, some companies’ credit ratings would likely face downward pressure, it said.
“For most US life insurance companies, asset risk is a significant risk included in the calculation of the RBC ratio,” Moody’s vice president Manoj Jethani stated.

“A sharp downward turn in the credit cycle that leads to a large number of credit rating downgrades within insurers’ bond portfolios, and a corresponding rise in defaults, would reduce life insurers’ capital strength.”

According to Moody's rating migration for those insurers with high concentrations of securities rated at the lower end of A-rating and Baa-rating can cause increased regulatory capital requirements relative to insurers with less exposure, reducing RBC ratios and potentially limiting insurance companies’ ability to take out excess capital as dividends to service holding company obligations.

Related Articles