As the initial operational shocks of Covid-19 are starting to subside, UK life insurers are tackling the question of how other aspects of their business (strategy, sales, reserving and capital management, financial disclosures) should be adjusted to take account of the present and potential future effects of Covid-19.
Why take action now?
There are risks to inaction. Some (re)insurers may play a waiting game, hoping to see what the effects of Covid-19 are in the longer term.
For pricing new business, whether protection or annuity business (in particular), this fails to counter the risks posed by Covid-19: data distortion, potential future waves of infection and behavioural changes among policyholders.
Also, existing best-estimate assumption-setting processes may be unreliable due to a new year of unrepresentative data, changes in the demographic profile of new customers and lapses, uncertainty about improvements in mortality linked to economic performance, additional waves of Covid-19 and delayed impacts of the lockdown.
- Insurers and reinsurers are reassessing their mortality assumptions
- This could have an impact on pricing
- Insurers are reassessing the risks associated with Covid-19
For insurers there is a further risk of an asymmetry of knowledge with reinsurers, who are likely to have invested more time understanding the impacts of Covid-19.
Finally, regulators and auditors may expect insurers to show consideration of the effects of Covid-19 on their business in their assessment of capital adequacy, in their business planning and in their assessment of the adequacy of their premiums.
There are also opportunities to gain a competitive advantage.
In the bulk annuity market, a detailed understanding of Covid-19 deaths and the potential for select effects and other mortality impacts may make the difference between being able to win on a competitive price and losing out on a tender.
There are also opportunities for product innovation for multi-line writers too, covering risks such as the risk of being furloughed or made redundant due to a future wave of Covid-19.
Pricing and underwriting
Both the base mortality and mortality improvements assumptions used for pricing will likely need to be updated to allow for the effects of Covid-19.
Companies will need to:
- Remove the effect of Covid-19 from recent deaths in their experience analysis; we have developed an approach to doing this (even when the number of actual Covid-19 and related excess deaths is not known exactly) and can tailor this to the A/E analyses used by life insurers to estimate mortality rates as proportions of standard tables.
- Have an evolving view of possible excess mortality in the second half of 2020, and also into 2021 (for example, due to second or subsequent waves) to allow an agile response to new information (vaccine/treatment progress, policy change and levels of adherence to social distancing).
- Develop a view of how non-Covid-19 mortality improvements may be accelerated or dampened by a range of economic, physiological and behavioural factors. Moreover, they will need a view as to how rapidly (or otherwise) excess mortality from Covid-19 deaths will decline, allowing for a perhaps unusual shape to mortality improvements not normally achievable through use of the CMI model alone.
In research recently undertaken for the life industry on the effects of Covid-19 in the UK, we looked at potential second wave scenarios and considered the potential effects of some of these factors on future improvements.
Detailed analysis of the possible risks from considering a range of scenarios can make it easier for the relevant technical committee and/or the board to approve the base mortality and improvement assumptions for use in pricing in the aftermath of Covid-19.
It changes an unknown level of uncertainty into something which can be described and measured. And since insurers will wish to update their persistency assumptions, the same future Covid-19 scenarios will also be able to inform this decision.
Many insurers have been considering their own risk and solvency assessment scenarios to assess the impact of additional waves of Covid-19 on existing business plans. Such work can also help to optimise business planning for a post-Covid-19 world.
Alongside demographic effects, insurers will need to consider asset-side shocks and further changes to new business volumes.