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We're now well over a year since the COVID-19 Pandemic began, and this means we now have some data that gives us some insights into how the Pandemic is affecting life insurers. Not surprisingly, when the Pandemic began, we saw ample hand-wringing among life insurance companies. Many of them quickly put strict restrictions in place regarding COVID exposure as well as a multitude of limitations on new business that sought to reduce general risk exposure.
Thankfully, with a little bit of distance between patient zero and now, many of these limitations have relaxed as insurers gain a better understanding of COVID and the risks it poses to them. But just because some life insurance companies are sighing in relief to the realization that COVID mortality wasn't as bad as originally speculated, that doesn't mean we're in the all-clear. Some insurers are definitely seeing a change in claims experience, and this might present a challenge for the foreseeable future.
Not All Claims Experience are Equal
We noted earlier this year that the life insurance industry shouldered a large increase in claims last year. While insurance companies handled that increase with little incident, it turns out not everyone experienced the same rise in claims.
According to Reinsurance Group of America (RGA), the biggest impact it experienced was among group life insurance claims. The individual life insurance market, on the other hand, had a much different experience throughout the past year. This isn't all that surprising. We know that COVID has tended to be more fatal among lesser economically gifted segments of the population, and group insurance tends to be the primary source of life insurance within these same population segments.
But Insurers Appear Able to Manage the Claims
COVID has certainly created an increase in claims. Here's a look at how it impacted claims at UNUM, one of the largest group life insurers in the U.S. That article discusses benefits to premium ratio, which is simply the dollars collected in premium divided by the dollars payout in claims. Despite the sharp rise in claims, UNUM continues to collect–for the most part–more money in premiums than it pays in claims to insureds. While the ratio is much thinner since the Pandemic began–and I assure you UNUM does not wish to continue this level of payout relative to premiums–well-established insurance companies have a strong income generation tool in the collection of policy premiums.
Should We Worry about the Future?
While COVID mortality will likely persist at elevated numbers for some time, it's unlikely we'll see any surprises that catch life insurance companies off guard. I think this is especially the case for life insurers with low exposure to group insurance business.
We do have a few predictions about how COVID will impact life insurance new business operations moving forward.
Potential Reprising On the Way
Actuaries generally design individual life insurance products with a pricing structure that assumes improvements in mortality. Since the current mortality trend is reversing–i.e. it's not improving as it had for several decades–it's possible we'll see a repricing take place on certain products. I suspect these will be thinner profit margin products like term life insurance and guaranteed universal life insurance.
It wouldn't be shocking to see newer products in these two categories roll out in the near to intermediate-term. Without mortality improvements assumed, these products will cost more per unit of death benefit. If you are contemplating a purchase of one of these types of life insurance, I wouldn't wait.
Limitations on New Business Will Likely Remain
When COVID first arrived, we saw a lot of restrictions placed on new business. These included:
- Death benefit limitations
- Premium limitations
- Age limitations–e.g. the insurer wouldn't accept applications for people over a certain age
- Refusal to issue a policy on anyone recently diagnosed with COVID-19
We also witnessed limitations on new appointments for life insurance professionals. So if you weren't already appointed to do business with certain companies, you couldn't start doing business with them–we assumed this was a way to limit new business during an unprecedented time of uncertainty.
A lot of these limitations have relaxed, but I suspect they won't completely go away for some time. I also wouldn't be surprised if some of them returned in certain fashion if we experience another ramp-up in COVID cases/mortality.
To be fair to life insurers, some of these decisions may be handed down by reinsurers. They would likely experience some of the most significant loss if COVID mortality did begin to affect individual life insurers to the same degree it appears to be affecting group life insurers.
Stiffer Underwriting Practices
Underwriting has certainly become a more rigid process in the age of COVID. I don't anticipate this reversing anytime soon. There was a time when we could possibly negotiate an underwriting decision if we had ample evidence that the applicant was evaluated favorably elsewhere. That strategy appears completely gone today.
The apathy insurance companies express towards losing a case because the underwriting department didn't view an applicant as favorably as the underwriting department at another company has never appeared higher.
Not all of this is necessarily COVID-related. We noticed a trend a few years ago among many insurers to stick to their original assessments much more stringently than in years prior. Access to big data drives a fair amount of this new direction.
Still, with the iffy-ness COVID presents for possible mortality and morbidity, I suspect insurers will be much less generous with their preferred plus offers now and for some time into the future.
So Far So Good
COVID presents an interesting anomaly with respect to mortality trends across the United States. The overall deadliness of the virus isn't the only consideration. The complexity of how something like COVID results in death demands time to observe and craft appropriate protocol. There are no doubt consequences leading up to death that may have nothing to do with the actual effect COVID has on the human body, and everything to do with the consequences of actions we take in an effort to combat the spread of COVID. How seriously that impacts mortality is not well understood and may never be all that well understood.
Still, the big picture data tells us everything we seek to understand at least within the confines of the time we have to understand it. Life expectancy did go down in 2020. This is ultimately worrying for the life insurance industry.
But…
The industry is well capitalized and well regulated. It appears to have handled what COVID threw at it up to this point, and also appears resilient to continue managing life with COVID.
