COVID-19 Impacts Life Insurers - The Updates

The COVID-19 outbreak is affecting the world economy in several dramatic ways, and the insurance industry is no exception. Though it is too early to determine the actual economic impact on the industry, we can surmise that it will not be good news for many industry factors, including return on investments, application activity, and overall revenue.

A recent report published by Deloitte Center for Financial Services points to the near-record-low interest rates as just one of the outcomes of COVID-19 that will negatively affect insurers. The report states:

“Interest rate declines will weigh heavily on the entire insurance industry but will most especially affect operations in the life insurance and annuity sectors. The Federal Reserve, in its first emergency move since the recession in 2008, on March 3 cut the federal funds rate by 50 basis points, then cut it again to near zero on March 15.6 This will likely have a major impact on life and annuity insurers, given their rate-sensitive products and investments. Many life and annuity insurers have already been recalibrating to address exposure to historically low interest rates. Some have modified products, often by lowering guaranteed rates. Additional adjustments of this sort may be required.”

Moody's Investors Services took it one step further, stating in a March 18th report that low-interest rates, if they persist, will hurt US life insurers' creditworthiness.

Specifically, the report states:

• US Fed’s recent actions amid coronavirus pandemic will weaken the creditworthiness of life insurers, whose business model is largely built on interest rates.
• Life insurers are highly exposed to interest rate risk, through their life and annuity products and their reserves, in addition to their assets, roughly 75% of which are invested in fixed income securities.
• US life insurers have adjusted to low rates. Nevertheless, lower interest rates will over time hurt every product with an interest rate component.
• US life insurers are starting from a position of relative strength. The strong US economy and booming equity market supported strong life insurance product sales and profits until this February.
• Moody’s expect insurers to report 2019 year-end NAIC risk-based capital ratios of 420%-450%, healthy levels, but lower than prior years.

It's not all gloom and doom, however. An April 30th report published by Moody's states that even with life insurance companies issuing premium deferrals, the financial impact on insurers will be immaterial. "Moody's expects deferral rates to be very low, owing to a number of factors including higher likely employment levels, and the ability to pay within the insured population vs. the uninsured population; a recognition of the need for life insurance amid a pandemic; and actions required by policyholders to initiate the deferral, with a demonstration of coronavirus-related hardship, or illness, as a criteria for deferral by many states."

Moody's has also recently reported that US death benefit claims will increase as a result of the coronavirus pandemic. However, if the total number of deaths remains within the credit rating agency's projections, the uptick should represent a modest decline in capital from death benefits.

While it remains to be seen how life insurers will fare during this time, it is indeed a welcome relief to know that not all news is bad news.

Emily Holbrook, Owner of Red Label Writing, LLC., is a veteran writer, editor, custom content strategist and wordsmith with 15 years experience in the content and publishing world.