COVID-19 A Life Insurance Perspective

Though Covid 19 is, first and foremost, a health crisis, it has not just impacted human lives but has also taken a toll on the financial markets and is having significant economic impacts reaching deep into many industries, not least the Insurance Sector.

Like many sectors, it is dealing with the operational challenges of remote working and cashflow management.  However, the insurance industry also faces momentous challenges due to its large exposure to both people’s health and the financial markets. 

Four Key Concerns

Four major concerns currently faced by insurers are:

  • Declining GDP – which has the potential to suppress the new business premium growth;
  • Exponentially increasing infection and deaths - which will drive claims;
  • Lower equity returns and interest rates – which will drive insurers’ solvency position and return on capital (ROC);
  • Operational resilience - to enable employees to work remotely and digital platform to interact with agents and clients to ensure business continuity. 

New Business Growth & Premium Income

The life insurance industry has already geared up for significantly weaker new business growth in the first half of 2020. If the situation continues into the third quarter of 2020, we would expect that companies might be significantly behind their plans and register less than 50% of expected volumes of new business in 2020 as a whole.   Furthermore, companies may face difficulties in collecting regular premiums as policyholders choose to pay up their policy or opt for waiver of premium options, if available.

Claims & Liquidity

Products offering benefits such as income protection and involuntary loss of employment are expected to generate significant claims.  Mortality claims are expected to spike in the regions with most infected cases. However, these benefits are reasonably well reinsured, and the older age profile of deaths cases may mean that many do not have life insurance, or they have less than would typically be held by younger cohorts of the population. 

Investment linked products business may experience significant levels of surrender or withdrawals, as people’s need for short term cash – to fill gaps created due to unemployment or pay cuts – outweighs their long term savings goals, even at a time when their portfolio may have lost approximately 20 percent. These are certainly going to dampen the ROC in 2020.

In the short term, liquidity is not a major concern for large insurance companies as these are well capitalised, but this could be a concern for smaller companies. The companies, regardless of the size, should assess how long it could survive without the inflows and put a plan in place accordingly.

Financial Market impacts

The life insurance and annuity business are feeling the real heat from the financial markets. They hold significant level of long terms assets to cover the long-term nature of their liabilities. The extreme volatility in the financial market since the outbreak, which is expected to continue in near future, could significantly downgrade their asset position. Globally, life insurance companies have 20 trillion dollars invested in the financial markets. This volatility is likely to have depleted their asset values by at least 20 percent, assuming that approximately half of the investment is in equities.

Liabilities, on the other hand, are on the rise as interest rates are slashed in all major economies. The liabilities for annuity business with significant guarantees will increase due to the fall in interest rates and this could potentially be a big issue for companies that do not hold a closely matched asset portfolio.

Companies operating in regimes with stricter Solvency requirements, such as European countries that use SII, are expected to be well capitalised but the same may not be applicable to regimes with a different risk-based approach to manage the solvency. It has become more important than ever that insurers do frequently monitor their solvency position to meet economic and regulatory requirements.

Operational Resilience

Employee safety is prime at the moment and companies with advanced work infrastructure are positioned better to deal with employees working from home. The interaction with agent broker and client is smoother for digitally advanced companies as face to face interactions has now become a thing of the past, at least in 2020.

OUTLOOK

Humans evolve as do businesses. The world has always learnt and moved on from whatever comes in its way. The life insurance industry is already witnessing the need for new technologically-driven and flexible working environment for the employees. It is highly likely, if the new working style is efficient and effective,  that companies may develop long-term remote-working environments, which could deliver an unprecedented savings in relation to the cost of leasing premises. The necessity of a digital platform to interact with the agents, advisors or clients is more prominent than ever; some companies are already winning the race, thanks to their visionary leaders. The life insurance business offering mortality, critical illness and income protection benefits may witness a bounce back in demand in Europe and the US.  Let’s hope so!

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RECOMMENDED SHORT TERM ACTIONS

  1. Communicate with your Customers.
    Keep in contact with your policyholders, make them aware of the options they have should they need to make a withdrawal or take a premium holiday.
  2. Monitor your Solvency Position. 

    (a)    use relatively simple models to quickly assess the impact of market movements on your solvency capital requirements, own funds and solvency ratio;

    (b)    consider a range of scenarios including best estimate, optimistic and pessimistic

    (c)     communicate with your regulator & investors in relation to this.

  3. Assess your liquidity position assuming no new business for the next 3 months, 6 months or 9 months; take the necessary steps to ensure that you have the right asset strategy in place to meet your commitments to policyholders and staff over the coming months.

WHAT WE CAN DO

Mazars provides actuarial expertise and tools to help insurers understand the risks they face and forecast the impact it will have on their businesses.

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