Covid-19 and insurers: back to square one

Published by Kim Durniat on

Estimated reading time: 6 minutes


We have now been dealing with Covid-19 for over six months. Ideally, we would like to think that we have learned a lot since the outbreak. But have we? 

As insurers are preparing for year-end liability valuations, many actuaries will be carrying out experience investigations to review recent history in order to predict future experience. Assumptions that will be impacted by Covid-19 are no different, but add significant challenges.

This blog discusses the actuarial challenges life insurers are facing due to the current environment. Let’s first have a look at what we know and what we don’t know about Covid-19. 

What we know about Covid-19

We know that the virus spreads quickly without measures to limit transmission. But as the data during the summer highlights, going into full lockdown can bring deaths and cases under control.

Over the last two months, we’ve also learnt that the virus can rebound quickly when restrictions are lifted, as seen in the rapid rise in cases across Europe in the autumn.

Many uncertainties remain

Looking forward, there remain a huge number of uncertainties when trying to understand what might happen to morbidity and mortality rates. We do not know:

  • The behaviour of the public during the second wave and whether new restrictions will be followed, in particular over the Christmas period
  • It is unclear when a vaccine will be available and how effective it will be. In addition, it is uncertain as to how long a vaccine will protect individuals and whether it will protect against different strains of the virus, similar to the flu vaccine
  • We don’t fully understand the link between Covid-19 transmission, severity of symptoms and weather. Will winter result in higher R rates?
  • There remains a lot of uncertainty around the long-term impairments for Covid-19 survivors
  • It is extremely difficult to assess the secondary impact of the pandemic; for example missed treatments and delayed diagnoses during lockdown and also lower levels of A&E admissions

What does this mean for life insurers?

Considering the above, it is more difficult than ever to project death, morbidity, unemployment and policy lapse/surrender rates. While we have learnt a lot about Covid-19, there remains so much that we do not know and modelling the future is no easier now than it was in March.

We have identified three key areas that actuaries need to consider during remainder of Q4 and in the start of the 2021.

Considering the above, it is more difficult than ever to project death, morbidity, unemployment and policy lapse/surrender rates. While we have learnt a lot about Covid-19, there remains so much that we do not know and modelling the future is no easier now than it was in March.

We have identified three key areas that actuaries need to consider during remainder of Q4 and in the start of the 2021.

When setting assumptions for future experience, it is important to differentiate between valid emerging trends in experience from abnormal, or “one-off”, experience that is not expected to impact experience in the long-term. 

For some firms, their data may not be showing much difference from previous periods. It may be that their experience analysis is not using the most up to date data, their population is small or that Covid-19 has not yet had much impact. However, firms will need to consider what the longer-term impacts will be. With potentially limited data and so many uncertainties, this is very challenging.

So what are we doing with clients?

We are recommending no knee-jerk reactions to what may be anomalies rather than long-term trends in experience.  There have been instances in the past, such as the reaction to A.I.D.S,, where the profession has been too pessimistic.

In the first instance, firms should determine required reserves on the basis of Covid-19 having one-off impacts on experience. However, there will need to be some judgement exercised in determining the expected severity and duration of the anomalous experience.

The potential longer-term financial impact of Covid-19 on the insurer will depend on the type of business written and the degree of reinsurance. Firms need to assess these impacts and make a judgement call as to whether or not to make additional provision for these. Covid-19 is too recent for us to fully understand the long-term impacts on cardiac and vascular impairments and also future life expectancy.

There’s no right or wrong answer at this stage, but there are some things that firms should do in forming their opinions:

  • Consider any historical data that may have some relevance, such as lapse and unemployment claim experience following the 2008-2009 financial crisis
  • Monitor emerging experience (both own and, where available, industry data)
  • Undertake stress and scenario tests to understand the potential impact of different scenarios

Ultimately, the decision making body needs to have the information it requires to be able to make an informed decision and to keep that decision under review. 

Insurers will have some understanding of the impact that Covid-19 has had on their experience. However, the question is “how will experience change during the second wave and the third wave if there is one”? In addition, how will the current large regional differences in Covid-19 cases impact firms?

Insurers will be carrying out regular experience analyses in order to identify any material changes, as mentioned previously, when analysing experience. It is important to identify trends and anomalies separately. It is also helpful to consider seasonal impacts that may be obscured by annual analysis and other potential drivers of experience; for example, location. These aspects are often omitted from experience analyses in benign times and may be difficult to implement at short notice, but they can add significant value in helping to understand the reason behind any spikes.

Another key area to consider is stress and scenario testing (SST). 

"The purpose of SST is to understand the resilience of the balance sheet and what levels of stresses the company can withstand. This enables insurers to make decisions on business plans and highlights where risk appetites could be breached."

Identifying the stresses and scenarios to test to represent Covid-19 is not an easy task. There are various areas to consider from economic to demographic factors. What combinations of these factors represent plausible scenarios for the pandemic we are facing and what levels of stress should be applied? Analysing the exposure to different risk factors, for example distribution channel or location, helps understand any risk concentrations and may assist in making more informed decisions about the SST to perform.

We know how difficult it is to set future assumptions. It is therefore vital that the firm considers sufficient scenarios to understand the potential impacts and, where necessary, formulate the actions needed should an adverse scenario materialise.

How can we help?

Here at BW, we have built robust and efficient experience monitoring tools to help insurers monitor experience regularly and efficiently. The tools analyse data and output the analysis by a number of risk factors, which can be specified by the users. They help identify quickly the key areas of concern allowing insurers to focus on important elements. 

Given the uncertainty around the severity of the second wave, government actions and how long the pandemic will last, more frequent and detailed experience monitoring will be required to understand the insurers’ position and highlight areas that require attention. We have recently launched a new service to carry out this analysis for firms with a focus on regional differences in lapses.

In addition, we have developed a framework to help insurance companies construct ORSA scenarios and areas to consider for SST. There is an infinite number of possibilities for scenarios, from economic to demographic and also consumer behaviour. We can help insurers limit the scenarios considered by focussing on the factors that matter. 

If you would like to talk about this topic or have any questions in general, please get in touch with your usual Barnett Waddingham contact to find out how we can assist you. Alternatively, please contact me below.

Stay up to date

Get the latest independent commentary and exclusive insights from a range of experts at the forefront of insurance, risk, pensions and investment – tailored to your preference.

Subscribe today