Impact of COVID-19 on Life Insurance

The COVID-19 pandemic has resulted in uncountable social and medical consequences across the globe. However, the immense financial impact due to the strain on the world economy has probably left the biggest mark, especially on the life insurance industry whose role is to provide protection against both mortality and longevity risks. This research brief covers the current impact on the industry and post-pandemic forecasts in terms of future operations and innovative changes.

Also, check out the Impact of COVID-19 on Medical Insurance Rates.

Impact of COVID-19 on Life Insurance

The life insurance industry has seen significant economic and operational impacts as a result of the global COVID-19 pandemic. The unstable stock markets have led to declining risk capital but the industry has so far managed to stay largely unaffected. Companies have implemented changes to their coverage options and underwriting practices while interest in life insurance policies among the public has grown over the past months.

1) Economic Impact

Life insurers with high exposures to morbidity and mortality risk could be hit particularly hard if the pandemic proves difficult to control, especially as the data continues to show that the risk of death from the virus increases with age and the prevalence of certain comorbidities. As the number of infections continue to rise, mortality rates in severe scenarios could trigger meaningful payouts relative to capital.

Market Volatility

• The COVID-19 pandemic has caused global interest rates to decline even lower than was seen during the 2007-2008 global financial crisis. For life insurance companies, persistent low interest rates have the potential to reduce their investment income meaning that they may not be able to meet contractually guaranteed obligations to policyholders.
•  Equity markets have continued to decline (in September, the Dow Jones Industrial Average slipped 2.28 percent, the S&P 500 Index lost 3.92 percent and the NASDAQ Composite declined 5.16 percent) and credit spreads have widened throughout the pandemic. These changes also affect the fixed income and equity investments of life insurers, as well as the life and annuity products they sell, leading to turbulent earnings.  
• As the available risk capital declines due to market volatility, the overall solvency ratio of life insurance companies decreases because of devaluations in the asset portfolio.
• For example, the US life insurance industry was estimated to have lost $50 billion in the first quarter of 2020 due to significant declines in the stock market at the start of the pandemic.
• Furthermore, the ongoing pandemic may force changes in the investment risk management procedures due to a higher challenge in the ability to predict and optimize these opportunities, and to protect the capital/security for policyholders and key stakeholders.

Current Effects

As of the time of this research, separate reports have shown that despite the market volatility, U.S. life insurance companies have performed better than expected but this could change in the coming months.

• According to an October 2020 Fitch Ratings article, life insurance investment portfolio losses have actually been reasonable despite the market fallout described above. This is because their surveyed portfolios have maintained stable, high-quality investment allocations, with majority fixed-income securities.
• Additionally, many life insurance companies have significantly reduced their estimates of exposure as a result of the pandemic, by an average of 40% to 50%. These exposures are measured by payouts per 100,000 U.S. COVID-19 fatalities. 
• For example, Principal Financial Group Inc.’s projects about $10 million in payouts per 100,000 deaths which is about half of it March 2020 estimate. 
• This is because life insurers are paying out far fewer coronavirus-related death claims than initially expected, finding that deaths are disproportionately among the population with little to no insurance.
• However, Moody’s, an American financial services company, has recently warned that US life insurers may see rating downgrades due to pandemic-related exposures in their fixed income investment portfolios which could lead to a higher probability of defaults. 

2) Operational Impact

As has been the case for businesses and industries around the world, the COVID-19 pandemic caused a seismic shift in “business as usual” procedures for the workplace. In the case of life insurance companies, many made adjustments that affected both employees and customers.

Workforce Changes

• Particular for the life insurance sector, actuaries who handle large data sets and models requires significant computing power and capacity.
• Having to quickly transition to remote conditions lead to increased collaboration between IT, finance, and actuarial departments to address the system access and processing time required to meet business needs.

Procedure and Processing Changes

• During the pandemic, companies would have implemented changes to the policy application, binding process, and waiting periods.
• For example, many life insurers began to offer no-exam policies at prices comparable to policies that required an exam to give buyers more coverage options at a time when medical exam appointments would have been limited due to the overstressed health system.
• On the other hand, many life insurance companies have imposed changes to their underwriting process as a result of COVID-19. Such changes include the postponement of applications from people who had planned or completed recent international travel, and the halt on policies for those older than 70 years old, both due to increased health risk.

Premium Payments

• Some life insurance companies have offered penalty-free premium deferrals to existing policyholders in the wake of widespread job losses and reduced income. Companies expect an increase in policy lapses in certain segments of their business if individuals are unable or choose not to pay premiums to keep their policies active.
• In the case of California, there was a statewide order that all insurance companies must offer at least 60-day grace periods for insurance payments to Californians.  

3) Increased Public Interest

• In May and June 2020, a survey conducted by Life Happens, an insurance industry-funded education group found that 30% of Americans were considering life insurance.
• The COVID-19 pandemic has led to a greater fear of death and an awareness of the financial risks associated with mortality.
• According to Jennifer Fitzgerald, the CEO of online life insurance marketplace Policygenius Inc., Google Search traffic for “life insurance” jumped 50% between March and May this year compared with the same period in 2019.
• Between April and September 2020, Northwestern Mutual saw a 15% jump in the number of life insurance policies it sold compared to the same time frame last year. Similarly, AccuQuote saw a 30% increase in policy sales due to the pandemic.
• Overall, the industry saw 2% growth in the number of total life insurance policies sold in the second quarter of 2020 compared to 2019. Moreover, there was a year-on-year 13% increase in applications among the under-44 age group during the third quarter of the year.

Post-pandemic Forecasts for the Life Insurance Industry

In a post-pandemic world, there are two main events forecasted for the life insurance industry — continued digital transformation of its operations and new systems to offer personalized life insurance based on consumer health data.

1) Digital Operations

• As previously mentioned, life insurance companies, like those in other industries, were forced to adopt remote working conditions due to the COVID-19 pandemic. This has led to an accelerated shift to future-of-work initiatives with insurers gaining real-time experience related to flexible staffing models and remote capabilities.
• Changes that were implemented since the onset of the pandemic and are likely here to stay include digital-hybrid solutions such as robo-advisors, video conferencing, and web chats.
• Some experts expect that the future of life insurance workers will see time spent in the office split 50-50 with time working remotely. In fact, Nationwide, a top 10 US insurance company, plans to have employees permanently work from home at 16 of its 20 locations.
• Lastly, the rapid uptake of more technologies including those involving artificial intelligence such as machine learning, neural networks and computer vision is expected to transform the industry from a state of “detect and repair” to “predict and prevent”.

2) Personalized Life Insurance

• Even before the pandemic, it was predicted that, by 2030, the number of people aged 60 and older will grow by more than 50 percent and more than 70 percent of annual deaths will be due to lifestyle and behavior.
• As a result, there is reason for life insurers to engage their customers in healthy living practices to increase policyholder longevity and technology will be important for this to happen.
• Life insurance companies can use data from connected devices such as wearables to provide policyholders with personalized reminders and advice regarding diet, disease management, physical activity and doctor appointments.
• According to the 2020 DXC Insurance Survey Report, 66% of consumers are willing to use technologies in exchange for better services and/or lower insurance premiums while 87% are comfortable sharing personal and lifestyle information to reduce premiums.
• These trends have only accelerated during the pandemic especially as life insurers have had to rely on more detailed questions and medical records in lieu of risky in-person physical exams during the underwriting process.