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Fitch Unveils COVID-19 Test Scenario

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Financial services regulators often use collections of economic scenarios to see how well companies seem to be prepared for the future.

Fitch Ratings has now described the COVID-19 scenario it will use to measure how well insurers are prepared for coping with the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) pandemic.

(Related: Another Reason Pandemics Are the Retiree’s Enemy)

The rating agency says it will use the new assumptions set over the next four to five weeks, in reviews of insurers’ insurance financial strength ratings, and then may continue to use the assumptions set in future reviews.

Here’s what Fitch is putting in its base COVID-19 assumptions set for life and health companies:

  • Key stock market indices are 35% lower than they were Jan. 1.
  • The two-year cumulative high-yield bond default rate will rise to 16% in the United States, and to 13% in Europe.
  • Government bond rates will continue to fall, high-yield bond rates will rise about 4 percentage points, and rates on investment-grade bonds will be somewhere in between.
  • Issuers with low-investment-grade ratings will have a hard time getting money from investors.
  • About 5% of people will have COVID-19,, and about 1% of the infected people will die. In the United States, that implies a scenario in which about 150,000 people die.

Fitch says it will start by using that set of assumptions to look at the ratings of the insurers that appear to be the most likely to face a rating downgrade. The company will also apply the assumptions set to insurers undergoing routine annual rating reviews.

Fitch notes that this bleak COVID-19 scenario is simply the “Rating Case” scenario, not the “Stress Case” scenario.

“The Stress Case will not act as a driver of rating actions, but instead will be an aid in the development of rating sensitivities,” Fitch says. “The Stress Case results will be discussed in the commentaries that Fitch publishes on each insurance company as it completes its ratings reviews.”

— Read Industry Starting to Recover From the Stresses of Last 3 Yearson ThinkAdvisor.

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