What’s next for life insurer assumption setting?

Most would agree it’s been quite a rollercoaster ride over the past few months. At least our Government’s policy of closing the borders to eliminate the disease has proven to be the right one for New Zealand. With the team of five million getting right behind that policy, we’ve been successful in limiting community spread.

Thus, when it comes to setting assumptions for valuing life insurance business, insurers have focused on the economic and societal impacts of a likely recession, rather than the direct impact of COVID-19 on insured lives. It’s been a matter of adjusting for more loss of income and mental health claims and increasing lapse rates, rather than assuming higher death claims and pandemic death reinsurance recoveries.

Of course, even making these assumption adjustments can be challenging, but at least events such as the Great Financial Crisis from recent history can help to quantify the possible recessionary impacts on insured lives. Therefore, from the perspective of a limited outbreak, and barring a few border control failures, assessing the immediate impact of the outbreak has been easier than it could have been.

But does our success in limiting this initial outbreak really signal the end of the pandemic for New Zealand? Actuaries should always think about adverse scenarios when monitoring the strength of their long-term solvency. Appointed Actuaries should also be evaluating emerging risks in their Financial Condition Reports, which company Boards so heavily rely upon. For example, there is a growing trend for insurers (particularly general insurers to date) to consider the impact of climate change on the resilience and financial strength of their companies. If that’s happening, then life insurers should be thinking about the possible outcome of the pandemic under a range of longer-term scenarios. In any event, actuaries should be thinking beyond this initial outbreak to what might happen next and taking those scenarios into account when reviewing the adequacy of their assumptions.

Our control of the outbreak is directly linked to the Government’s policy of eliminating the disease through keeping our borders firmly shut. But we cannot assume our borders will stay closed for ever. Clearly our best hope for reopening our borders is an effective vaccine. The speed of development and the progress globally in producing a vaccine is astounding yet promising; however, significant challenges remain in completing human trials of largely effective vaccines, organising large scale manufacture, coordinating global distribution not to mention convincing a significant proportion of the population to be vaccinated. All of these factors added together means we’re still a long way from vaccine-driven herd immunity for New Zealand’s population. In this situation where a vaccine is not available in the next year, or possibly not at all, the Government may eventually face a difficult decision to reopen the borders.  

Setting assumptions that are linked to the policy of the Government of the day is something insurers face all the time. Whether it’s taking into account the current monetary or fiscal policy, or allowing for the strength of the country’s health system, insurers find their decisions and long-term views inextricably linked to government policy.

So, what might happen if we do reopen our borders without an effective vaccine? Sweden has become the byword for a failed attempt of a modern, sophisticated economy trying to manage the pandemic with the aim of achieving herd immunity. Research is also emerging of the long-term impacts COVID-19 has on disease survivors. While direct deaths from COVID-19 are mainly limited to older members of the population (not the bulk of New Zealand’s insured lives), research is showing potential long-term damage to the lungs, heart, kidneys, blood vessels and the brain in younger lives.

Impacts like those outlined here may not be palatable but they should be considered and discussed, and certainly in the context of assumption setting. Further thought needs to be given by insurers when working through what the impacts might be, especially when we already have found ourselves in such an unprecedented situation.

Read more from our Insurance Services article series:

• The insurance sector and COVID-19: What about the customer? 
• How insurers can build resilience in light of the COVID-19 crisis
• COVID-19: The impact on insurance innovation
• COVID-19: The future of mental health and the insurance sector

The content of this article is accurate as at 19 June 2020, the time of publication. If you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.