Severe stress scenarios could cause the risk-based capital (RBC) of US life re/insurers to deteriorate to an extent that would put credit ratings under pressure, according to analysts at Moody’s.
The rating agency currently considers the US life industry to be well capitalised with a median RBC ratio of 447%.
However, it found that applying a rating migration stress lowers the ratio by 69 points (15% decline) to 378%.
Although re/insurers would still remain well capitalised relative to regulatory requirements, some companies could see negative impacts on their credit ratings, Moody’s warned.
“For most US life insurance companies, asset risk is a significant risk included in the calculation of the RBC ratio,” says Manoj Jethani, a Moody’s vice president.
“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,” he explained.
Moody’s added that insurers with a high proportion of securities at the lower end of A-rating and Baa rating are most susceptible to RBC ratio declines.
Rating migration for these insurers can cause increased regulatory capital requirements relative to insurers with less exposure, analysts explained, reducing RBC ratios and potentially limiting insurance companies’ ability to take out excess capital as dividends to service holding company obligations.