COVID-19 impact to life insurance and annuity companies

Considerations from an actuarial and finance perspective

Given the uncertainty that exists in these unprecedented times, we expect that life insurance and annuity companies could face both short-term and long-term challenges to maintaining business continuity and profitability. In this piece, we discuss potential impacts to insurers and provide considerations around disruption to operations, economic impacts, setting of actuarial assumptions and forecasting, and responding to regulatory and rating agencies as the COVID-19 pandemic continues.

COVID-19 impact to life insurance and annuity companies

Operational impact on life insurance and annuity companies

Economic impact from an actuarial and finance perspective

While the social and medical consequences of COVID-19 have been significant, the shock to the economy and markets is having a large impact on life insurance and annuity companies. Interest rates and equity markets have declined, credit spreads have widened, and implied volatilities have increased. Each of these movements affects fixed income and equity investments, as well as the life and annuity products insurers sell, creating balance sheet and earnings volatility. This comes at a time when companies were already tackling the implications of multiple regulatory changes including current expected credit losses (CECL), international financial reporting standard 17 (IFRS 17), principle-based reserving (PBR), and long duration targeted improvements (LDTI).

Insurance companies are assessing the effectiveness of their hedge programs and considering their cash flow expectations over the next year. Reduced sales combined with unpredictable policyholder behavior could challenge the ability to predict and optimize investment opportunities. The treasury function will need to assess and provide increased cash flow that will affect actuarial and finance projections. The volatility in actuarial balances will likely require increased attention and analysis due to increased strain on capital positions.

Financial asset valuation and impairment

COVID-19 is creating additional volatility in the global markets, which has affected the value of equity investments and fixed income (for example, credit spreads may widen or the creditworthiness of counterparties may be affected). Moreover, as a result of the pandemic, entities may need to assess their investments and loans (such as commercial mortgages) for impairment.

This is the first quarter that public insurers are required to adopt CECL, an impairment model for loans and certain other fixed income investments that is based on lifetime expected credit losses rather than incurred losses. CECL requires more extensive modeling of credit risk considering a number of different factors, including various economic and loss scenarios. COVID-19 is causing insurers to refresh macroeconomic scenarios and assumptions for current market conditions and potential prolonged economic recession (such as unemployment or negative GDP growth). Companies are further considering whether the use of extreme economic scenarios would yield reasonable results (in light of interest rate impact masking credit concerns).

Finally, insurance companies should assess the impact of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and evaluate troubled debt restructuring or purchased credit impaired implications of new fixed income acquisitions.

Actuarial assumptions and forecasting impact

  • Actuarial assumptions
    Actuaries will need to determine how to set economic and non-economic actuarial assumptions in the face of market volatility, changing consumer behavior, and uncertain mortality and morbidity events related to COVID-19. Consideration should be given to both the short-term impact on setting assumptions as well as the potential long-term impact on policyholder behavior and risk profile.
  • Mortality
    Actuaries will need to determine if COVID-19 will have an impact large enough to require revised mortality assumptions. As COVID-19 peaks, mortality events are expected to decline.

    The ultimate mortality impact of COVID-19 may depend on the timing and effectiveness of vaccine and therapy solutions. However, the experience to date has shown an increased risk of mortality to the elderly and individuals with preexisting health conditions. Companies can begin to analyze their in-force blocks of business and assess the potential mortality risk profile of COVID-19.

    Proactive mortality risk management and monitoring may be an effective strategy, given that the long-term mortality impact of COVID-19 is expected to be much more difficult to quantify and analyze.
  • Mortality improvement
    Mortality improvement over the past several years has been muted, which may likely continue. The impact on mortality trends will reflect a balance between increased short-term mortality combined with heightened attention to social and health care improvement in the longer-term. Actuaries will need to consider reducing or eliminating improvement considerations when forecasting the next year or two as well as understanding the impact of future improvement scenarios.
  • Morbidity
    Companies are monitoring the immediate and long-term impacts to morbidity as a result of COVID-19. The impact of COVID-19 will be driven by the impact on those who recover from the virus as well as monitoring the limited access to healthcare during the government and social restrictions.
  • Lapse
    The economic pressure of losing a job, or a reduction in income, may force policyholders to voluntarily lapse their policy. Reflecting on the 2008 market crash would provide actuaries with more insight and data to consider when setting lapse assumptions. Annuity carriers with dynamic lapse assumptions may need to monitor experience closely, as policyholders may respond differently to an equity decline induced by a pandemic, as opposed to prior economic downturns.
  • Premiums
    Predictions for near term premium behavior should consider policyholder behavior as well as company sponsored premium deferral programs. Actuarial models will need to be updated to reflect changes in expectations as well as timing of premium payments. This may prove to be complex, as administration systems and actuarial platforms were not designed for anticipating premium deferrals. The financial reporting process and controls may need to be adjusted to reflect the changes in premiums.
    The impact on claims processing will depend on the facts and circumstances facing each company with regards to effectiveness of their virtual work environment and shift in claims frequency. Monitoring and partnering across functions can provide timely insight to allow the actuarial and finance departments to adjust balances and projections.
  • Reserving and forecasting
    Given the operational and economic items discussed above, actuaries may need to adjust how to accurately model these impacts in reserving and forecasting models, such as leveraging static and dynamic validation techniques. In the early stages of this pandemic, companies may want to explore one-time adjustments. Regardless of the assumption being assessed, the unpredictability in the medical, social, and economic conditions will require flexibility in actuarial and finance assessments. Providing multiple scenarios and anticipating internal and external requests can provide management with the insights needed to make timely decisions.

Communicating financial results

Investors and analysts will likely expect insurers to provide additional insight into the impact of COVID-19. Specifically, there will be a need to understand interest rate sensitivity, outlooks for capital position, and clarity around significant estimates and assumptions.

Internal and external audiences will likely expect insight into current and future results. Understanding and performing sensitivity analysis on key assumptions could arm management with the insight needed to communicate and address these inquiries.

The actuarial and finance perspective in a changing landscape

Companies should be prepared to continue to fulfill their fiduciary responsibilities, adapt operations to run successfully in a virtual world, and continue to deliver high quality customer service in a time when customers need it the most. As regulatory and management actions transpire, finance and actuarial functions should demonstrate agility to meet the changing landscape and expectations.

Get in touch

Matthew Clark, FSA, CERA, CFA, MAAA
Principal, Deloitte Consulting LLP
+ 1 312 241 6906 |
Wallace Nuttycombe
Principal, Deloitte & Touche LLP
+ 1 973 602 6769 |

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