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Article | Insurer Insights

COVID-19 impacts life insurers on several fronts

By Fergal O’Shea , Gareth Sutcliffe , Mike Wilkinson and Matthew Edwards | March 20, 2020

Life insurers face a particularly broad range of coronavirus related issues – from maintaining business continuity and ensuring wellbeing to managing the market fallout from the crisis.
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The speed at which coronavirus has spread from a relatively localised issue into a global pandemic means that insurers have had little time to prepare. But it’s clear; prepare themselves they must.

COVID-19 poses a broad set of challenges for life insurers about how they can manage the impact of the outbreak in a controlled way to mitigate the short-term effects and potential longer-term implications. Additionally, business continuity issues, market dislocation and the uncertain mortality outlook will impact the very core of insurance capital and profitability. Let’s consider the issues in depth.

Business continuity and employee wellbeing

Business continuity is a primary concern. Companies need to prioritize employee wellbeing and prepare for the possibility of significant staff illness.

Business continuity is a primary concern. Companies need to prioritize employee wellbeing and prepare for the possibility of significant staff illness. They must also manage the increase in the number of employees working remotely while considering the potential impact from external sources.

Immediate staff welfare issues require companies to clearly communicate public health information and advice and evolving company policies on topics like business travel and internal meetings. But given the timing of the expected infection peaks in countries around the world, factors such as clarity around benefits and potential impacts on performance management and discretionary pay are also likely to need review.

Wider implications and likely necessities will include:

  • Review and refresh relevant operational risk scenarios, assumptions and mitigations to assess their ongoing applicability both to current circumstances and to a full range of potential COVID-19 scenarios (including second-wave attacks).
    • These should range from the most probable to more extreme and consider the immediate implications for existing controls and management actions as well as triggers for reviewing model outputs.
  • Confirm that your business continuity plan is relevant to plausible outcomes, fully up to date, and any weaknesses from testing are fully understood and mitigated where relevant.
    • Take appropriate pre-emptive steps as set out in the business continuity plan to ensure timely maneuvers, when needed.
    • Recognize potential reductions in productivity resulting from mitigation actions taken and additional IT, system and data vulnerabilities.
  • Consider key person risk, and how the absence of critically-skilled individuals will be managed and contingency plans put in place, combined with effective reprioritisation to focus on critical activities.
  • Ensure that operational risk monitoring and breach reporting is in place, supplementing when appropriate in terms of breadth, frequency and visibility. This important function should have high resilience under all scenarios.
  • Reconsider the risks from outsourced services based on current information and projected scenarios, focusing initial mitigation efforts on the most material impacts in the short to medium term.

Steps to boost market resilience

COVID-19, along with lower oil prices, has led to significant market volatility. Insurers are faced with a combination of lower equity prices, wider credit spreads, lower swap and government bond yields, and greater volatility in all asset lines. It is difficult to predict the impact on liquidity, but very plausible that there could be significant disruption. Undoubtedly, the coronavirus is having a greater impact on specific industries and geographical areas, with downgrades and possible debt refinancing concerns emerging.

Faced with this set of circumstances, the following seem logical steps to take:

  • Ensure that solvency monitoring is accurate and management information is available on a timely basis.
  • Confirm that stress and sensitivity tests are up to date and capital models will remain calibrated throughout foreseeable market impacts.
  • Assess hedging programs and asset and rate exposures – determine how well they are suited to the current conditions.
  • Consider tactical asset allocation, or adding or adjusting hedging positions for the short or medium term.
  • Stress test liquidity positions, and take any appropriate precautionary steps.

Impacts on modeling and assumptions

Life insurers will want to model the range of impacts on customer business; however, the speed with which the virus has spread means that available data on which to base the underlying assumptions for transmission rates, mortality rates (and their variability by age and state of health) and the effectiveness of control measures comes with very large uncertainty ranges (although this will of course change over time).

Clearly, annuity writers will experience an unusually high mortality year, even under the more benign scenarios imaginable. Protection writers will see a mortality impact likely similar in magnitude – but hopefully smaller than – their capital allowance for life cat risk. The major question for them is the extent of their reinsurance.

The main losers will be firms with large whole of life books but low levels of reinsurance: there is likely to be a large amount of sum at risk for policyholders in their 50s and 60s, for which there will be a significant mortality impact.

The outcome is uncertain, but will be material. Insurers will want to be best placed to assess the range of outcomes and continue to collect data and refine their assumptions and modeling very quickly as matters develop.

For pricing and underwriting of protection policies in the remainder of 2020, there is the obvious risk of anti-selection. This is not a new risk, but more the same risk in a different shape, and firms must ensure that short-form underwriting procedures are sufficiently robust in light of coronavirus. There is also a two-tailed aspect to this risk: Firms must avoid any accusations of misconduct by ensuring policyholders are fully aware of any early exclusions in the cover.

Pricing assumptions might need to be different this year, not just for mortality and morbidity but also for lapses (e.g., worried new policyholders who have rushed for cover may have rushed away by this time next year, as the public psyche returns largely to normal).

Decisive action

What is absolutely certain is that, above all else, this fast-moving situation will require life insurers to move quickly to adapt to the new, hopefully temporary, market reality that the COVID-19 outbreak is creating.

Willis Towers Watson’s preparations and business continuity

At Willis Towers Watson we are taking steps to protect our ability to continue protecting our own people and assessing how we continue to best meet our client’s’ needs.

We are closely monitoring the spread of COVID-19 and, to date, have instituted some restrictions around travel as well as for large meetings and events. In addition, we have mandatory work-from-home guidelines for potentially impacted colleagues.

Willis Towers Watson has thorough processes in place around business continuity and incident management, which have now been activated. In the event of any public health concern that may potentially lead to a high rate of colleague absence, we will focus available resources on business processes that directly support client needs.

As part of our incident management response, we will also implement working- from- home and other operational actions as necessary to limit exposure. While no contingency plan can eliminate all risk of temporary service interruption, we continually assess and update our plans to mitigate all reasonable risk. We will continue to closely monitor the spread of the virus and put in place additional measures as and when necessary.

Additionally, we have been managing our response to COVID-19 for our businesses operating in Asia for several weeks, refining our approach for other global regions as the situation continues to develop.

Specific measures we have activated include:

  • Travel restrictions for high-risk locations, reviewed daily
  • Guidelines for large meetings and business events, and the encouragement of more virtual meetings
  • Work-from-home guidelines for colleagues with potential risk exposure
  • Controls to limit office access, where necessary
  • Split team operations and remote working arrangements
  • Enhanced cleaning regimes
  • Ongoing review of recovery plans

Matthew Edwards
Head of Mortality and Longevity

Fergal O’Shea
Senior Director 
Insurance Consulting and Technology

Head of Insurance Investment Team

Mike Wilkinson
Senior Director
Insurance Consulting and Technology

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