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Life insurers adapt pandemic risk models after claims jump

Life insurers adapt pandemic risk models after claims jump
Medical staff treat a coronavirus disease (Covid-19) patient in their isolation room on the Intensive Care Unit (ICU) at Western Reserve Hospital in Cuyahoga Falls, Ohio, US, Jan 4, 2022.
PHOTO: Reuters

LONDON - A coronavirus pandemic which lasts five years, another pandemic in a decade, and ever more transmissible variants are among the scenarios life insurers are predicting after Covid-19 claims jumped more than expected in 2021.

The global life insurance industry was hit with reported claims due to Covid-19 of US$5.5 billion (S$7.4 billion) in the first nine months of 2021 versus US$3.5 billion for the whole of 2020, according to insurance broker Howden in a report on Jan 4, while the industry had expected lower payouts due to the rollout of vaccines.

"We definitely paid out more than I had anticipated at the beginning of last year," said Hannover Re board member Klaus Miller.

The increase in claims was largely down to the emergence of the Delta variant, twice as transmissible, and more likely to cause hospitalisation than the original coronavirus strain. 

Claims rose most in the United States, India and South Africa due to the more lethal variants and a rise in fatalities or illness among younger and unvaccinated groups.

Dutch insurer Aegon, which does two-thirds of its business in the United States, said its claims in the Americas in the third quarter were US$111 million, up from US$31 million a year earlier. 

US insurers MetLife and Prudential Financial also said life insurance claims rose. South Africa's Old Mutual used up more of its pandemic provisions to pay claims and reinsurer Munich Re raised its 2021 estimate of Covid-19 life and health claims to 600 million euros (S$925 million) from 400 million. 

The long-term nature of life insurance products — often lasting 20 years or more — means premiums are not yet capturing the risk that deaths or long-term illness from Covid-19 will likely remain higher than previously estimated. Competition in the industry is also keeping a lid on premiums.

Actuaries say rising claims will be eating into the capital which insurers set aside to ensure solvency.

In the initial "shock" period of the pandemic in 2020, the insured US population suffered 12 per cent more deaths than average, according to research from life insurance trade association LIMRA shared with Reuters.

"For the insurance industry, that's not huge because we have reserves," said Marianne Purushotham, LIMRA's chief actuary.

"We're always trying to compare the new variant to the initial shock," she said.

The impact for insurers in 2020 was more muted because deaths were mainly among older people who typically do not take out life insurance.

Crystal ball-gazing 

As the pandemic continues to surprise with the Omicron variant now becoming dominant, insurers, reinsurers and specialist risk modelling firms are looking to the future.

"We take into account the possibilities of more transmissible and less transmissible (variants)," Narges Dorratoltaj, scientist at modelling firm AIR said. "We cannot say specifically which path we are going to follow but we are trying to come up with the possible ranges to at least narrow down the possible outcomes."

AIR is factoring in periodic lockdowns around the world and is also considering factoring in more uncertainty over whether governments will continue to impose restrictions to keep transmission rates low, and over individuals' willingness to obey them, Narges said.

Risk modelling firm RMS said its updated Covid-19 projection model allowed for variants, such as Omicron, which show elements of vaccine escape, as well as for variants which might evade vaccines.

Reinsurer Swiss Re said its pandemic model takes more than 20,000 different scenarios into account. It has been updating its risk model regularly with the latest data on testing, vaccination, infection, hospitalisation and fatality rates.

How long, what's next?

With the emergence of the even more transmissible Omicron, Covid-19 vaccine manufacturer Pfizer has said it does not expect the pandemic to subside to an endemic state globally until 2024. 

AIR's model anticipates that the pandemic, caused by a virus first identified in China in December 2019, could last five years.

Excess deaths could continue as the virus becomes endemic, similar to influenza which causes many deaths each year despite vaccines.

"We would expect to see some medium-term (impact on claims) of five to 10 years," LIMRA's Purushotham said.


More deaths or long-term illnesses will require insurers to set aside more reserves to pay claims, and may force them to raise premiums.

Insurance risk experts also say the opportunities for transmission between humans and animals, high levels of global travel, increased urbanisation and climate change impacts such as deforestation and disease-carrying mosquitoes mean pandemics could become more frequent.

"A new coronavirus outbreak is indeed likely in the near future — within the next 10 years," said Brice Jabo, principal modeller, life risks, at RMS, referring to the severe acute respiratory syndrome (SARS) and Middle East respiratory syndrome (MERS) outbreaks in the last two decades as early warnings.

The potential for any future corovanirus outbreak to again become a pandemic would depend on its transmissibility and the strength of measures to fight it, Jabo said.

Bruno Latourrette, chief knowledge officer of reinsurer SCOR Global Life, said he did not expect the next pandemic to be as devastating as Covid-19.

"Covid is...the perfect storm with pre-symptomatic contagiousness, a lethality that is not too high to lead to super-strong zero tolerance measures, a waning of immunity and high transmissibility".

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