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The impact of pandemic on life insureds

24 June 2020 Gareth Stokes

It will take years for life insurers and reinsurers to get to grips with the behavioural changes introduced during and following the COVID-19 pandemic. Neil Parkin, chief pricing actuary at RGA South Africa used a phrase attributed to a Prussian writer to introduce his aptly-titled ‘COVID-nomics’ webinar, hosted 12 June 2020. The “fog of war” explains a dynamic in which we do not understand the extent of the threat posed by our enemies nor our capacity to combat that threat, he explained. We can create our current reality by substituting ‘pandemic’ for ‘war’ and ‘coronavirus’ for ‘enemy’.

An overload of information

“It is extremely difficult to evaluate the information, let alone the volume of information, that this pandemic is generating,” said Parkin. Of far greater concern is that accepted ‘truths’ shared during the early stages of the outbreak have since fallen away. The World Health Organisation’s stance on wearing face masks to counter the spread of the disease is a case in point. We were initially told that masks did not help; then that they helped in some instances; and then that they should be worn whenever we go out in public. Those at the frontline of combatting COVID-19 infections face similar challenges as advice about types of medication and treatment evolve. 

Parkin noted that case fatality rates, transmission rates, and other modelling terms associated with disease varied widely from one country to the next, largely based on differences in testing. “The fatality rate in Italy, which goes as high as 21,8% for the highest age segments, is linked entirely to who they are testing, how the tests are conducted, and how the eventual deaths are recorded,” he said. In other words, if the tests are largely conducted in-hospital the outcome will be wholly different to tests conducted across the general population.

Uncertainty presents unique challenges to pricing actuaries, who rely on estimates of a population’s morbidity and mortality experience to set risk-appropriate premiums for life and health insurance products. 

Forecasting ‘new normal’ mortality rates

How will the mortality experience change post-pandemic? Assessments made at 10 June 2020 show excess mortality of 64 200 deaths year-to-date in the UK (a 57% increase) and around 100 000 in the US (+26%). There are, however, wide disparities among different population sets. So, for example, New York recorded 24 800 excess deaths (+302%) between January and 10 June. “Data from the South African Medical Research Council (SAMRC) suggests that South Africa’s overall mortality decreased during March, when lockdown started,” said Parkin. “Deaths from both natural and unnatural causes have decreased compared to historic data”. This experience looks set to continue through April and May 2020; but will no doubt change as we enter the pandemic peak. 

“The jury is still out on the longer term impact of the COVID-19 pandemic on mortality,” said Parkin. He added that a variety of factors, including improvements in longevity, made him “overall bullish that the long term impact on mortality would be muted”. He observed that funeral and group products that were priced annually would be impacted by short term mortality trends; but that the pricing impact on high-end products with full underwriting would be limited. Advice to insurers was to reconsider disability product structures, with close attention to definitions and replacement ratios. “It might also be a good opportunity to revise what our products look like and how they are offered to the market,” he said. 

Lapse experience looking dire

Financial advisers will have to plan for an expected deterioration in the lapse experience over the next two to three years. RGA US noted a big impact on termination rates for disability products through the Great Recession (2007-2009). “We can expect that termination rates will be affected, and the extent and duration of the recession will determine how quickly they drop,” said Parkin. A possible outcome is for a decline in disability claims initially, followed by a significant surge, and then a long period to taper off to some kind of normal. Critical illness claims do not represent a major challenge to insurers; but financial advisers should brace for a slew of lapses due to critical illness policies being expensive relative to other disability and mortality covers. 

The elephant in the room centres on the impact of a deep economic recession on the credit life insurance segment. Economists have warned that South Africa faces the worst economic contraction in history, with millions of formal sector job losses through 2020 and 2021. “There is a lot of uncertainty about where unemployment goes,” said Parkin. “But IMF estimates of 1,5 million job losses in 2020 would result in 9% of all currently employed people losing their jobs”. Credit life insurance products are usually priced for between 10 and 12 claims per 1 000 lives exposed; if IMF forecasts are correct, insurers could experience 90 claims per 1000 lives. Another concern is the impact of unemployment on suicides, with US data pointing to a 1% to 1,6% increase in suicides for every 1% increase in unemployment. 

Understanding behavioural changes

Consumer purchasing behaviour has changed during the pandemic. RGA’s recent surveys show that those who ranked COVID-19 as having a potential high impact on their health, and those who stocked up on food pre-lockdown, were more likely to purchase insurance. “We worry that some of the purchases made now are out of panic and will lead to lapses down the line,” concluded Parkin. He expected consumers to shift towards affordable products with basic cover due to growing economic pressures. 

Writer’s thoughts:
South Africa’s financial advisers are well-positioned to assess changes in consumer behaviour, especially when it comes to so-called grudge purchases. What is your experience through lockdown? Have you seen more request for quotes from individuals looking to bulk up their death and disability cover through pandemic; or are lapses the order of the day? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].

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