How Life Insurance Companies are Impacted by COVID-19

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"A couple days ago there was an article in the Wall Street Journal talking about how COVID-19 could be a double threat for insurance companies. One being death claims, two being the record low interest rate environment. So, I wanted to ask the actuary, what's this doing to insurance companies right now, are they okay?" - Steve Cain

On this special video episode, we do a little role reversal. Steve Cain interviews me about how life insurance companies are impacted by the current market environment and COVID-19.

We are seeing life insurance company stocks with dramatic price volatility over the last week. How are the insurance companies fundamentally impacted by this crisis?

Insurance companies are impacted on both the asset and liability side of the balance sheet. However, probably the greatest impact over the next several months will be on insurance company assets.

Insurance companies hold reserves backed by assets. These investments are generally speaking, high quality bonds. The reserves represent the dollars held to pay future claims and expenses (less future premiums received.) Insurance companies also have another layer of assets on the balance sheet called surplus. This an additional amount of assets on top of reserves that provides a cushion if funds are needed beyond the actuaries' estimates. The state regulators monitor both reserve and surplus levels to determine that the companies are financially sound.

The biggest impact during times of crisis tends to be the likelihood that the bond investments (generally large corporations, but also municipality bonds and mortgage investments,) will default or have to be written down. Insurance companies often hold reserves (AVR) for this credit risk and this reserve has grown during the past decade of relatively low defaults. However, should several other large corporations default on their bonds because of the impacts of COVID-19, then insurance companies could also be impacted. This will be specific to the insurance company and the specific corporate credits that they hold.

There is a lot of talk about how the low interest rate environment has negatively impacted life insurance companies. While this has strained the finances of insurance companies over the past decade, the main impact is how insurance companies have coped with this issue in past, and how much credit risk they currently own in the impacted corporate sectors.

The good news is that lower treasury interest rates has meant that the value of the existing bond investments has increased, although this is offset by the widening of credit spreads. The net impact is probably not as material because U.S. life insurance companies generally hold investments at book value on the statutory balance sheet and do not reflect market value fluctuations unless there are other than temporary impairments to the credits.

Many insurance companies may take this crisis as an opportunity to reprice their current products, bring awareness to encourage consumers to buy more insurance, and invest positive net cash flows into better investment opportunities.

On the liability side of the balance sheet, life insurance companies also pay out money in the event of premature deaths (increased mortality), which could be elevated in a pandemic. However, this is mitigated by a number of factors:

1. Mortality has not yet been elevated enough as compared to other major causes of death to impact overall actuarial expectations.
2. The elevated mortality has primarily occurred in individuals at older ages and for individuals in long term care settings where the insurance companies already have expectations of higher mortality.
3. Insurance companies have other types of liabilities on the balance sheet that offset the mortality risk such as annuities.

This is not an exhaustive list of the impact of the crisis on insurance companies and each company has factors unique to their asset and liability profiles. It is too early to tell what the impact of this crisis will be on life insurance companies, but it is probably premature to suggest that the industry as a whole will be challenged by the pandemic. In my opinion, we are more likely to see challenges that are specific to individual companies.

By Marc Glickman, FSA, CLTC, LTCP

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