Considerations for setting persistency assumptions

People using calculators

A group of Life actuaries, working as part of the IFoA Covid-19 Action Taskforce (ICAT) are releasing a series of blogs considering various ways that the pandemic has affected Life insurers.

The fourth blog in this series looks at considerations for setting persistency-related assumptions.

Introduction

This article sets out factors affecting persistency-related assumptions that can be valid for the whole range of life insurance products. Health products are not directly included in the scope of this article, as these are considered by a separate ICAT workstream. Where relevant, comments are made on differences between single-premium and regular-premium products and specific considerations in each case, including where there is an inter-dependency between life and health insurance.

Factors affecting persistency assumptions

The factors stated below cover lapses, surrenders, full or partial withdrawals, and paid-up rates assumption-setting considerations that Covid-19 has brought to the insurance industry.

  1. Type of product

The table below shows the availability of important product features that affect whether there is a monetary amount paid on full or partial termination of policies. Availability of surrender value or paid-up rates is unlikely to vary between participating and non-participating savings products within each product type; therefore, impact on participating and non-participating products has not been considered separately.

Product feature\Product type

Whole life

Term insurance

Single premium

Unit linked

Surrender value

Available

Not available

Available

Available

Paid-up

Available

Available

Not available

Available

For products that don’t offer a surrender value or a paid-up rate, persistency may be less affected than products with a pay-out available upon termination. In addition to the availability of a pay-out, the range of factors below may be influenced by the pandemic and impact persistency.

  1. Age of policyholder

The age of a policyholder affects his or her circumstances. Covid-19 has seen a higher recovery rate, and hence lower mortality, in younger age groups worldwide. The mortality rate has been skewed towards higher ages. A higher mortality rate has been observed at older ages primarily due to comorbidity at higher ages. While many individuals are advised to undergo self-isolation, elderly people have been hospitalised for Covid-19 treatment. Costs of medical treatment for individuals who are diagnosed with Covid-19, and have subsequently been hospitalised, are high, and in many cases may be unaffordable for individuals.

The level of financial support provided by governments varies across the globe. While many European and Asian countries provide health insurance to its citizens through government-funded schemes, there are other countries that provide a lower level of health coverage to their citizens, and the level of private health coverage is also likely to be low in such countries. Moreover, hospitalisation expenses due to a declared pandemic may not be covered under health insurance.

To finance their medical expenses, policyholders may surrender life insurance policies which have accumulated a reasonable surrender value. Under non-pandemic circumstances, persistency is lower at younger ages and higher at older ages, as younger policyholders are likely to experience frequent changes in their needs and circumstances. However, it is also important to note that income from pension, state benefits, health insurance and other savings of older individuals may not be sufficient to finance urgent medical expenses due to Covid-19. Hence, they may surrender their life insurance policy for a one-off cash lump sum which will meet these expenses.

A shift in the persistency rate at higher ages should be considered by insurers when setting assumptions, as well as taking into consideration the level of coverage and dependence on health insurance that is available in the relevant country.

  1. Type of policyholders

The occupation of policyholders in a pandemic is likely to affect their financial stability. Broadly speaking, the policyholder can be categorised as a blue-collar or white-collar worker.

In a pandemic, the financial soundness of blue-collar workers is likely to be more affected than that of white-collar workers; hence their circumstances will have greater effect on both the type of insurance policies they purchase and those they retain. A case in point is niche occupations, like the actuarial profession, which is less affected by Covid-19 as the demand for actuarial professionals remains significant, whereas the supply is limited. Therefore, individuals belonging to certain professions may not be reconsidering their existing insurance policies as their financial status is not affected. In contrast, casual labourers who are typically employed on a temporary or part-time basis will experience financial difficulty due to the slowdown of economies and consequent lack of demand. This category of policyholders are therefore more likely to reconsider their existing insurance policies.

Employers whose businesses are financially affected due to the pandemic and who have purchased group term assurance for their employees may decide to reduce the level of coverage and hence their cost of insurance. As these are annually renewable policies, smaller employers may not renew the coverage in the succeeding financial year.

Life insurers should make additional considerations for the type of policyholder in their persistency assumptions in the light of the pandemic. In particular, it is important to take into consideration both the policyholder’s occupation and its nature (blue collar/white collar) for insurance issued on an individual life basis. For group insurance, until businesses recover from the losses due to Covid-19, the rate of renewal of group term plans is also likely to be negatively affected, especially for small employers.

  1. Impact on the economy

Countries across the world have witnessed an increase in the rate of unemployment and economic instability. The stock market has plummeted to historically low levels and has subsequently rallied since the onset of Covid-19. A Covid-19 led recession is expected to dominate until normality is restored across the world and economic activities are reinstated. In many countries, large parts of the population have also been forced to work at reduced pay due to Covid-19. The hospitality and tourism industries are most affected due to travel restrictions and social distancing. Affected individuals are likely to cut down on unnecessary expenditure, and hence insurance, if insurance benefits seem to be far-fetched, decreasing the persistency rate.

Insurers need to consider their portfolio compositions, especially in respect of lives covered within the most affected industries. Insurance contracts on such lives may experience lower persistency rates.

  1. Perceived value of insurance

With the onset of Covid-19, policyholders across the world have been sceptical about death coverage due to the pandemic. However, as death and survival benefits provided by life insurers largely cover death due to Covid-19, the perceived value of life insurance for policyholders due to the virus is likely to increase as policyholders’ fear about uncertainty in death will increase.

As a result, the persistency for pure protection products may not be impacted and may even increase.

  1. Distribution channel and customer support

Due to Covid-19, there has been a shift in the distribution channel adopted by insurers at large. The imposition of lockdown and/or restriction of movement to essential activities have increased reliance on digital platforms for sale of new business. Prior to Covid-19, the face-to-face interaction of insurance company representatives with policyholders for servicing of existing business and the level of support provided to customers was higher compared with the current situation. As insurers are operating with very limited capacity, there has been heavy reliance on online and telephonic sales/support.

The chances of inappropriate policies being sold through these channels may increase as the scope of advice given and underwriting performed reduce. This may result in increased lapse rates for these policies in the near future. At the same time, as financially sophisticated policyholders are likely to make informed choices when they purchase insurance online, the negative impact on persistency due to forced sales by agents will reduce. As insurers continue to operate with limited capacity, the impact of customer support on persistency level is more crucial due to the high level of competition in the life insurance market.

Expense loading is lower for digital channels as they are more efficient for insurers. If insurers share this benefit in the form of reduced premiums to policyholders, premiums may become more affordable to policyholders and the persistency rate may increase as a result.

Conclusion

The overall impacts on persistency experience and therefore assumption setting for life insurance products are contingent on a combination of factors. While each factor outlined in this article is likely to affect certain groups of policyholders or life insurance product types, the extent of the impact will vary based on the portfolio composition of each insurer. The impact of the Covid-19 pandemic is also different in different countries. Due to the pandemic, it is important to consider a wider range of factors that might influence persistency than in previous reporting periods and decide on their relevance and applicability in each case.