Potential differences in impacts of Covid-19 in different countries
A group of Life Actuaries, working as part of the , are releasing a series of blogs considering various ways that the pandemic has affected Life insurers.
In the first in this series, they consider potential differences in the extent of Covid-19 that may or may not have an impact on the assumption-setting processes in a particular company and its businesses in different countries.
Different countries have responded in a variety of ways to the coronavirus, including the implementation of various forms of lockdowns, and the relaxation of lockdown measures in a phased manner and over different timescales. The maturity of the existing health infrastructure (eg access to hospitals or availability of healthcare professionals) is also expected to impact availability of treatment and has a concomitant impact on recovery rates, mortality rates, claim rates and insurers’ expenses. Insurers might incur additional costs from claims spikes due to Covid-19 on the in-force books of business, which was not factored in when products were priced or when valuation assumptions were set in the previous period.
The impact on the economy is expected to have a visible impact on lapse rates, new business volumes and expense inflation assumptions, as economic activity has been muted due to the various restrictions that governments have implemented to curb the spread of the virus. Governments have responded to the Covid-19 pandemic with different approaches; the effectiveness of these actions will determine how the pandemic ultimately impacts the population and insurance companies’ books.
Following the relaxation of lockdowns, the impacts will also depend on how individuals and companies in each country embrace new safety measures, such as physical distancing and effective workplace safety procedures. This will include compliance with these measures in public places, while travelling and even working remotely. Those nations that depend upon the most severely hit sectors (tourism, hospitality, oil exporters, the food industry etc) as their primary contributors to the economy would be affected to a greater extent, with a knock-on effect on different industries, including the insurance sector.
According to the 1World Health Organisation (WHO), the regions that have had the largest number of Covid-19 cases have been the Americas followed by Southeast Asia and Europe. Per-capita impact consideration may help insurers gain a better understanding of some of the key drivers of higher infection rates and consider the extent of the impact on their insurance portfolios, including valuation assumptions.
Other organisations that potentially have meaningful data and could provide useful information to actuaries are the United Nations (UN), the International Monetary Fund (IMF), particularly on economic performance, and the widely used 2Oxford tracker that has performed a global analysis of the policy responses of various governments. Actuaries should consider utilising additional data sources in order to inform their analysis of the pandemic’s impact on assumption setting.
Policy responses and influences of Covid-19
1. Lock-down restriction and other measures
Generally, those countries and regions that were fastest to impose lockdowns and close international travel had lower transmissions of the virus and were able to contain the spread more effectively. Countries such as Austria and New Zealand implemented their lockdowns when they had a low case count and were better able to limit the transmission compared to countries that implemented these measures after infections were more widespread. Other countries, such as India, implemented the lockdown relatively quickly but have seen a rise in cases post-relaxation of the restrictions, highlighting that different dimensions need to be considered when forming a forward-looking view of the experience. The 3health infrastructure in different countries is a factor that has an important effect on how effectively individuals continue to be treated. Actuaries should consider these factors when determining the extent to which assumptions should be strengthened or otherwise in their business jurisdictions relative to other regions.
2. Economic support
The economic support measures implemented by different governments would have had an impact on limiting the adverse effects on national economies. It has been observed that low income countries, such as emerging market economies with high debt levels, were not in a strong position to weather the storm4. For these countries it will be necessary to consider the effect of worsening claims and lapse experience over a prolonged period.5 It has been projected that economic recovery may take longer for some of these countries. An assessment of the fiscal health of a specific country would need to be taken into consideration when setting an appropriate economic basis for the upcoming valuations.
3. Stringency of the lockdown
Governments applied different types of lockdown measures, which will have impacted economic activity. There appears to be a correlation between the variety and the extent of restriction measures taken and the level of adverse effect on economies.6 Nations that employed measures such as instructions to stay-at-home and restrictions on staff working from offices had greater impacts on their economies than those that relied on fewer restrictions, such as only stopping international travel. These different impacts on economic activity would have affected insurers who write group business. The extent of the impact would vary and two main reasons need to be considered here by insurers: the affordability of corporate benefits that would have reduced due to the impact of the restriction measures, and potentially increased claims for insurers that provide pay-outs to policyholders upon loss of employment (ie retrenchment benefits). These factors need to be considered when reviewing the group valuation basis.
4. Government response over time
The relaxation of the lockdown restrictions process has also been different in different regions. Some governments opened their economies very gradually, while the response of others shifted much more rapidly. If not managed carefully, 7the lifting of the restrictions could result in a second wave of cases that can repeat an elevated mortality experience and significantly reduce the positive effects that governments’ responses to contain the virus have had so far.
This could be an area that differentiates how quickly insurance companies will be able to return to a level of operations similar to that before the pandemic and will influence the volume of sales and expenses.
5. Population profile
Emerging data has shown that Covid-19 has had a more pronounced impact on older populations compared to younger groups. This could have an impact on setting mortality assumptions (for both group and individual business) and termination assumptions (eg PHI business) that are appropriate.
Insurers that have an in-force book consisting of an older demographic profile compared to younger groups, or are closed to new business, may need to make more significant adjustments in this regard to the incidence, mortality, and recovery rates. In addition, the extent to which a population carries existing co-morbidities is an important consideration, as higher mortality rates have been observed in people who were suffering from existing diseases and ailments (obesity and diabetes etc.).
6. Regulatory responses
Any relaxations in the rules of renewal, relaxed capital requirements or approval of new products by regulators need to be considered. The steps taken by the regulator can have an impact on, among others, insurers’ expenses, claim cost and capital requirements. For example:
- Relaxations on premium renewals
- Issuance of guidelines to expedite the claims settlement
- Relaxing the co-payment by the policyholder on health claims
- 8Adoption of a risk-based capital regime and additional requirements, such as a proposed introduction of new solvency requirements by the Insurance Regulatory and Development Authority of India (IRDAI) that would take into consideration the results of socio-economic shocks like Covid-19.
Actuaries need to consider regulatory actions and responses in their regions while setting assumptions. This would not be the same in different countries and may impact reserving as well as pricing.
Actuaries need to consider whether the existing contracts with their reinsurers provide the required cover against Covid-19 related claims. The base structure of reinsurance contracts and therefore clauses within them can vary greatly between regions and companies. Differences may be influenced by regulations and/or traditional approaches. If existing contracts do not provide the required cover (as per companies’ risk appetite or policies), this can trigger double loss for the insurers where they must meet the additional claims due to Covid-19 with no recovery expected from their reinsurers. This can lead to increased claim costs and expenses for insurers and may result in increased capital requirements.
The points discussed above are not exhaustive but are intended to assist actuaries with a number of considerations. These considerations are set out in respect of potential differences in the extent of Covid-19, which may or may not have an impact on the assumption-setting processes in a particular company and its businesses in different regions. Taking account of as wide as possible a set of considerations related to the business portfolios in different regions will help reduce the risk of omitting potentially important factors.