Covid-19: year-end 2020 valuation considerations for insurers

Published by Kim Durniat on

Our expert

  • Kim Durniat

    Kim Durniat

    Partner and Head of Life Consulting

  • Estimated reading time: 5 minutes

    It would be an understatement to say that 2020 was an unusual year. Now that the new year is upon us and after a lot of planning, actuaries will be focusing on performing year-end valuations, including finalising forward-looking assumptions.

    The impact of Covid-19 on experience in 2021 and beyond remains an area of huge uncertainty and, as such, this year actuaries must challenge their approach to setting assumptions and how they communicate the uncertainties to the Board.

    In this blog, we will discuss different approaches firms may take to reflect the uncertainty with the valuation, including holding additional reserves and the importance of performing sensitivities. 

    How can insurers set the right reserves?

    Although it has been over a year since the outbreak of the virus, there remain a lot of uncertainties. These include the impact on recovered individuals’ long-term health, the timing of vaccine rollout and how long the recession will last. 

    At the start of the pandemic, insurers were hesitant to hold extra reserves in relation to the pandemic. This makes sense as there was little or no data to help firms to set these reserves. 

    However, now that we have almost a full year of data, we are seeing an increasing number of firms looking to hold additional “short-term” reserves for the impact of Covid-19 and reassessing their experience at year-end with the nine to twelve months of pandemic data that they have available. 

    At present, a short-term reserve seems a sensible option compared to ignoring the virus or incorporating the abnormal experience in long-term assumptions.

    To do this, it is clear that experience monitoring has a vital part to play. Firms should look at their 2020 experience in detail to understand the impacts of Covid-19 on claims to date. They also need to consider the likely impacts of the third wave of the pandemic in the first quarter of 2021.  

    Here at Barnett Waddingham we are helping clients monitor experience in “close to real time”, with a detailed breakdown to understand where experience has differed by month, sales channel and even UK region as the virus developed throughout 2020.

    Below are two snapshots from one of Barnett Waddingham’s experience monitoring tools. 

    Source: Barnett Waddingham Lapse experience analysis tool

    We believe it is through this level of analysis that firms can confidently challenge the need for a short-term “Covid-19” reserve and have the evidence to back up this number when presenting to the Board. 

    Given the ongoing uncertainty about the impacts of the virus, any historical analysis will need to be supplemented by expert judgement. However, the historical analysis is a vital ingredient. Without this it will be impossible to confidently argue for or against the need for any additional reserves, or to justify the level of any additional reserve proposed.

    Providing context through sensitivities

    Regardless of whether or not you establish an additional reserve for Covid-19 related claims, the Board needs to understand the potential impact of the pandemic on the firm, from both insurance and wider economic risks.

    A good valuation report should be to help the Board understand the solvency position of the business and highlight the risks and uncertainty around this position. Only with this information can the Board make better informed decisions. With all the additional uncertainties around Covid-19, performing sensitivities and stress and scenario testing / analysis is more important this year-end than ever. 

    While many insurers may undertake the bulk of stress and scenario testing when carrying out their own risk and solvency assessment (ORSA), it is important to ensure that sufficient analysis is conducted as part of the year-end valuation. For some, this may mean accelerating some of the work typically performed as part of the ORSA process. It is imperative that the Board understands the resilience of the balance sheet and the degree of adverse experience the firm is able to withstand.

    Avoiding a ‘tick-box’ exercise

    Firms may have a list of sensitivities that are performed year on year, do not change and are not challenged. This is inappropriate. It is crucial to avoid sensitivities being seen as a ‘tick box’ exercise.

    All firms must continuously challenge the sensitivities performed and adapt them as the business and external influences change. In our opinion it would be rare for there to be no required changes year-on-year.

    A critical review of scenario analysis is especially important for year-end 2020. Firms may have made significant changes to their risk management framework, dividend policies or the way risks are managed. Any changes will need to be considered when performing stress and scenario testing to ensure all potential risks are being captured. 

    At Barnet Waddingham, we have helped firms develop their stress testing approaches. We have considerable knowledge and experience of the stress tests performed by a wide variety of insurers and can help firms identify appropriate stress and scenario tests.

    In particular, we have developed a COVID-19 scenario framework with key “forks in the road” to help firms assess possible scenarios for consideration in relation to the virus.

    For more information about this topic, please contact your usual Barnett Waddingham consultant or the author below. You can also get in touch with Nada El Khashab, a key contributor to this blog. 


    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