The coronavirus pandemic has turned everyday life upside down for nearly every American. Many schools have closed and in certain areas residents have been ordered to stay in their homes. As its impact is felt across the economy, the insurance industry will not be spared. Some of the effects will be felt across the industry, and some will hit individual insurance sectors harder than others. What follows is an overview of how the virus is playing out among insurance companies.
- Human resources: Many insurers have moved a vast majority of their employees to a work-from-home status. This presents not only a technological challenge, in making sure every worker has the right equipment to work remotely, but also a practical one, as day-to-day work routines are interrupted.
- Compliance with regulatory filing requirements and governance: We have seen some states provide written guidance suggesting that meetings for policyholders, shareholders, boards and committees should be considered to be held virtually. Additionally, they have welcomed outreach for extensions of deadlines by insurers that face hardships meeting filing deadlines, although at this time they have not provided a blanket approval of any extensions.
- Investment portfolio losses: Many insurers invest a significant portion of their portfolio in investment grade corporate debt, municipal debt and Treasuries. For example, the iShares iBoxx Investment Grade Corporate Bond ETF, an exchange-traded fund that tracks U.S. dollar-denominated investment grade corporate bonds, was consistent until March 6 on a year-to-date basis. Then from March 6 to March 19, it fell about 22%. U.S. Treasuries, which were gaining from early February, have also had a sizable drop from their high on March 6, even though they remained positive for the year. Despite the tendency of insurers to have large bond portfolios, insurers typically also invest in equities, which have not fared well. The S&P 500 has fallen over the same time by about 19%.
From bonds to equities, insurance companies’ investments have taken a hit …
- Enterprise risk management: The insurance industry tends to have high-functioning enterprise risk management functions. Depending on the how the ERM program was created, a risk may or may not have been identified as it relates to a global pandemic. We would expect most companies to focus on how to incorporate pandemic responses within the ERM program if it was not previously included.
- A.M. Best ratings: Similar to any significant change to the world’s economy, we would expect A.M. Best to review insurers specifically in terms of their response to changing events.
- Claims related to Covid-19: We would expect that there will be several thousand people to require in-patient medical care to treat the coronavirus. But predicting the number of claims will be difficult. Analysis performed by Bloomberg Intelligence using South Korea’s experience suggests that the U.S. health system could see an increase of in-patient admissions of about 4.2%, or more than 1.5 million. But if the hospitalization rate in the U.S. mirrors that of Italy, we would expect closer to a 20% increase in hospitalization. There are a lot of factors that influence these percentages — for example, the amount of testing that has occurred, the number of undetected contractions, the age of the cohort who contracts the virus. Think, for instance, if there is an outsized outbreak in Florida, where a larger number of older Americans live. Actuaries attempting to estimate the claims expenses related to Covid-19 and the March 31, 2020, claims reserves will have to use several points of data to estimate this unusual event.
- Claims delays: We would expect that health care providers who submit claims to insurers will have a delay as a result of the disruption to business. Most health insurers have timely filing requirements. If an insurer’s historical experience indicates that a certain percentage of the completion of claims occurs one or two months after services rendered, that may need to be adjusted in the claims reserve process.
- Shifting of timing of services: Many providers have followed the U.S. surgeon general’s recommendation to delay procedures that can be put off. These services range from some cancer surgeries to cosmetic procedures. The goal is to free up capacity for providers so they can focus on treating patients with Covid-19. This could be a temporary benefit to health insurers; however, it’s also another unusual event that needs to be considered in the claims reserving and forecasting analysis.
- Change in membership and collectability: Unemployment could drive a reduction in commercial membership and some of the members could shift to Cobra coverage. Collectability of commercial and individual premiums could also present an issue given the economic hardships that many will face for some time to come. Goldman Sachs’ analysts have made a predication that 2.25 million Americans could enter unemployment status.
Source: St. Louis Federal Reserve, Goldman Sachs estimate
- Increased mortality: While it is true that the vast majority of people who contract the disease will survive, some will not. Similar to the analysis above regarding the hospitalization rate, mortality rates differ from country to country.
- Decreased longevity: On the flip side, insurers with pension and annuity exposure will experience diversification benefit that could offset losses in their life insurance blocks.
- Increased regulatory scrutiny: Regulators may require increased monitoring of the aggregate impact to life insurers. Leveraging third-party infectious disease models like RSM will be key in assessing risk holistically for these organizations.
- Increase in creditor claims: Carriers with exposure to creditor insurance products or collateralized loan obligations should expect an increase in claim frequency in the hardest-hit sectors of the economy.
Property and casualty insurers
- Working from home: With more individuals working from home, it stands to reason that they drive less frequently. Auto insurers should continue to monitor the effect of a general reduction in miles driven by those who are no longer communing to work.
- Claims: Insurers who write policies for business interruption, travel and event cancellation policies will face more claims, but they will be offset by expected decreases in auto and trucking lines. Many of these policies, however, are written in ways that could exclude Covid-19 as an insured event. This will likely be a highly contested issue in the years to come.
- Premiums: A decline in volume for worker’s compensation premiums is likely, which could pose liquidity concerns for carriers as they rely heavily on premium cash flow to pay longer-term liabilities.