Life insurers reassess Covid-19 risks

Consistency between the mortality effects and the other shocks will be important if these scenarios are to demonstrate awareness to the regulator of the whole range of risks posed by different possible second wave outcomes.

Capital modelling

The pandemic has highlighted a key weakness of the Solvency II standard formula mortality catastrophe allowance – its age, gender and region-agnostic strength.

Internal model companies may have seen this component of their model as unimportant and been satisfied with a similar flat stress, but may now wish to investigate more granular stresses. 

Dependency assumptions will no doubt be in the spotlight too: Covid-19 has brought about material shocks to equity values, credit spreads and interest rates, and may have triggered operational risk events.

Many companies will have surmised so far that their capital ‘by risk’ has been adequate, but the dependencies have not, and these dependency assumptions should be revisited in light of recent experience.

Companies also need to beware of adjusting too much to allow for the precise nature of the coronavirus shock: the key is to use these lessons to prepare better for the next shock, which is unlikely to be identical to what we have just seen.

Finally, there will be considerable interest from investors in the response of (re)insurers to the changes and challenges brought about by Covid-19.

Companies will therefore need to consider the messages they present to the investor community about the present and future effects of Covid-19 on their business, and their preparedness for further waves of the pandemic.

Through analyst presentations or financial reports, they will need to address likely investor concerns around the effect of Covid-19 on sustainability of business models, risks to dividend-paying capacity and earnings growth, and key judgments underlying the financials, which may need to be revisited in light of Covid-19.

Richard Marshall is a director in Willis Towers Watson’s insurance consulting and technology business