COVID-19 – the implications for life insurers - COVID-19 blog | Deloitte Australia has been saved
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Trang Duncanson, Deloitte Life Insurance Partner and Actuary considers some of the specific implications of COVID-19 on life insurers, in particular the need for companies to update their Internal Capital Adequacy Assessment Process (ICAAP) stress test processes to inform the Board on the impacts to profits, capital and to plan a pathway to the restoration of ‘normal’ operating target surplus.
Dealing with the Immediate Responses
Overall the implications on the following four areas will be the most immediate.
While business continuity impacts will be the more immediate concern for life insurers, the focus here is on financial impact considerations for life insurers, in particular on their ICAAP processes.
Ensuring the Restoration and Recovery of Capital
Life insurers will have established ICAAPs in place with an increasing ladder of intervention, with triggers requiring actions as its capital levels fall below certain levels over time. This is supported in the ICAAP via stress and scenario testing, which has been developed over the last five to seven years under APRA’s supervision.
There will typically be established scenarios within the ICAAP considering a pandemic, a recessionary or depression scenario, as well as a China downturn scenario. This suite of assumptions should be revised and updated for the emerging events from COVID-19.
Life insurers must hold regulatory capital for an ‘event’ stress under APRA’s prudential capital standards for insurance risk, which was introduced explicitly in 2013. The minimum requirement is to allow for a pandemic event causing death and illness across its portfolio to a specified level.
Most life insurers hold only the ‘minimum’ within their insurance risk capital. It is imperative that the life insurer stress test its existing capital levels for adequacy against the emerging impacts from COVID-19 by considering the following:
Other impacts on the life insurer’s capital base, which should be incorporated in this round of stress testing for COVID-19 include:
There may be some positive assumption impacts that should also be considered by the life insurer in the COVID-19 scenario. These include the impact on risk insurance sales (potential increase in volumes) and potentially some reductions in asset concentration risk charges as asset values fall.
The direct financial impacts on the life insurer are therefore multi-faceted. However, the financial net impact on life insurers will be negative with even greater strain to emerge for life companies over the medium term.
Life insurers are well placed as an industry as they have a comprehensive and established ICAAP process in place. Notwithstanding this, life insurers will need to urgently test their ICAAP and put in place much more regular solvency reporting to their Boards and APRA.
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Trang Duncanson is a Partner of Deloitte with more than 20 years’ experience working with life insurance companies at both Deloitte and in corporate roles. She has implementation experience across the breadth of actuarial services, in particular regulatory capital, ICAAP, IFRS17 for life insurers, Financial Condition Reporting, actuarial modelling efficiency projects across capital and insurance valuation, and appraisal valuations.