How has Covid-19 affected insurer solvency?

They are consequently subject to stringent solvency regulations, which consider their assets and liabilities/capital position for both the present and the future. 

An insurer is solvent if its assets exceed its liabilities/capital requirements but in practice it will always aim to hold more reserves than the minimum required. 

Steven Graham, technical policy manager at the Institute and Faculty of Actuaries, says: “Solvency assessments are tailored to the risks that an individual insurer faces, with those selling life assurance being exposed to the risk that there are more deaths than expected and those selling critical illness being exposed to higher-than-expected morbidity rates.”

Investment returns are a big issue as well as claims because if investments plummet it can have a major impact on solvency. 

Capital reserve requirements

While some investments like gilts are used specifically to match claims, reserves are spread around a broad range of asset classes, and insurers may also use hedging techniques to offset risk.

The current prudential regulatory regime in the UK is still the EU’s Solvency II Directive, which requires insurers to have enough capital to survive a 1-in-200-year event, and little is likely to change because of Brexit.    

Charles-Marie Delpuech, associate director, insurance practice at S&P Global Ratings, says: “The UK government has launched a review of the regulation but we do not anticipate developments in the UK's solvency framework to significantly depart from the existing Solvency II framework.“   

Solvency assessments are tailored to the risks that an individual insurer faces.--Steven Graham

Underwriters, who work out the terms that policyholders are to be offered at outset, also play a key role in the risk equation. 

They assess medical and lifestyle information provided on application forms and, when they consider it necessary, can request GP reports or even medical examinations. They also pay great attention to population-based morbidity and mortality tables produced by actuaries. 

When underwriters feel that risks are above average they can impose premium loadings or exclusions or, in extreme cases, decline applicants altogether. 

Premium loadings are typically between 50 per cent and 400 per cent but can be higher, particularly for young people with cancer.      

These tried and trusted methods of keeping strong reserves and mitigating risk have been vindicated by the coronavirus pandemic because the rating agencies are not citing issues with solvency.         

Our profits have been dented by payouts but our solvency has not been affected.--Peter Hamilton

The pandemic effect

The Moody’s Investment Services Insurance -- Europe 2021 Outlook report states that: “The impact of coronavirus on European life insurers has been limited as the virus mostly affects older people, who are typically not insured.”

Indeed, there is more concern about the potential impact of ultra-low interest rates and other investment risks, which affect insurers of all types. 

Willem Loots, senior director, insurance at Fitch Ratings, says: “The Solvency II regime helped UK insurers weather debt and equity market volatility during the onset of the pandemic. 

This provided the first macro field test of the regime, and insurers were largely able to maintain adequate short-term liquidity and capital ratios in excess of risk-appetite, while avoiding pro-cyclical behaviour, such as selling securities at depressed prices.”

Some underwriting tightening for the more serious protection risks has helped. For example, Aegon is not offering cover for new risks where people have combinations of significant problems like obesity, diabetes or old age.

Simon Jacobs, underwriting and claims director at Aegon, says: “Our knowledge as underwriters evolves over decades but Covid-19 is a brand-new condition, and a year ago we had no idea just how hard it would hit us. 

The Solvency II regime helped UK insurers weather debt and equity market volatility during the onset of the pandemic.--Willem Loots

So, we needed to take action to ensure the business remained viable long-term and was not disposed to disproportionate numbers of claims. This probably affected no more than 5 per cent of our book.        

Alan Knowles, managing director of specialist protection intermediary Cura Insurance, feels that the proportion of policies affected by the underwriting tightening is actually much higher than the 5 per cent commonly volunteered by insurers.      

He says: “They are only including people who apply for cover and not the many with health problems who are turned away at the pre-application stage. 

“But insurers haven’t increased standard prices or imposed many exclusions, although a few income protection providers offering very short deferred periods have put on Covid-19 exclusions.”

Protection claims

It is clear that life claims have increased significantly but most statistics only refer to the first half of 2020. 

According to the Association of British Insurers (ABI), UK insurers received about 7,000 Covid-19 life claims between 1 March 31 and May last year, paying out £90 million. 

Yet there has so far been no spike in income protection claims, and critical illness claims have actually fallen, probably because lockdown has seen less screenings and GP visits. 

Peter Hamilton, head of market engagement at Zurich, says: “Our profits have been dented by payouts but our solvency has not been affected. 

“There could be a backlash next year with more critical illness claims from delayed diagnoses and, because more advanced cancers are much harder to treat, this could increase life claims as well. 

But, on the flipside, Covid-19 has accelerated deaths that would have been future claims.    

“Increased mental health claims and Long Covid could also boost income protection claims further down the line. We are still learning a lot about Long Covid, which can affect various organs in the body and leave people unable to work. But I’m very confident none of this will affect our solvency.”  

Edmund Tirbutt is a freelance journalist