COVID-19 Long Term Challenges on Life Insurers

Robert HebronLegal InsightsLeave a Comment

Article Authored by Robert Hebron

Consumer demand is rising but requiring a new method of consumer interaction

While consumer demand is ratcheting up, social distancing and the movement of commerce to a consumer centric technology-based interaction is as well due to COVID-19.  At the same time, the industry’s mortality assumptions and underwriting rules will be challenged in ways that point towards making the product more expensive and harder to get. 

To surmount those challenges, the industry will need the support of regulators and possible legislative remedies to maintain affordability of the product of the market it serves. 

By doing nothing, the industry by default will:

  • Find itself raising prices
  • Tightening underwriting standards
  • Shrink its market  

Coupled with this, lower interest rates on its fixed-income investments and increased mortality will drain capital.  While the industry will undoubtedly survive, smaller less well-capitalized companies (depending on their mix of business) may well fail. 

The role of risk management and risk-sharing across the industry, in particular reinsurance strategy will need to be reassessed to preserve the solvency and financial strength of companies. 

The core goal is to ensure a broad number of competitors remain viable alternatives to consumers.

Fortunately, there have been recent developments in the industry and the regulatory environment enabling the use of online data to underwrite applications and complete transactions. With these technology enhancements, the industry may have many of the tools it needs at its disposal to surmount these challenges. 

The ability to:
  • Reach consumers
  • Determine their need
  • Select a suitable product and
  • Electronically complete and sign necessary documents

Face-to-face meetings are no longer necessary. The streamlined processes can now be performed completely
online, yet these tools are not widely used.  Information sources that render medical exams unnecessary without a corresponding loss in underwriting protection are available with a buyer’s consent. 

In addition, the industry working together and with its reinsurers has the means of properly addressing risk-sharing and carrier solvency concerns. In addressing these challenges, the industry will not only self-benefit, the families and small businesses it protects when more breadwinners and heads of small businesses are insured will too.

I will illustrate the potential for accomplishing these lofty goals with a couple of discrete examples focusing on:

  1. Consumer Interaction
  2. Financial Management

Finding and transacting with customers

First, if indeed the consumer is in a self-initiating mode when it comes to exploring life insurance or can be readily prompted to express interest through local print and online advertising:

  • Agents clearly can meet with that consumer using camera mediated face-to-face online technology.
  • Readily share through that technology any paper discussion aids.  
  • Documents can be securely completed and signed online as well.  

This will require a great deal of distributor retraining and new means of providing distributors with marketing support, reallocating marketing budgets to be more efficient in the face of social distancing. 

Second, given what can be learned typically from a paramedic exam of an insurance applicant, I would argue that equal or greater underwriting protective value can be garnered through:

  • Evidence that an insured gets a regularly scheduled routine physical.
  • Has a primary care physician that they see at least annually.
  • By obtaining the insured’s medicinal usage records from a pharmaceutical database that is currently available.

Finally, the use of good health application supplement statements just prior to policy delivery can offset concerns over COVID-19 generated anti-selection activity. The potential to get extremely close, if not achieve, a completely online and/or telephonic sales experience is possible. 

A potential upside and competitive advantage for the companies who innovate

These suggestions will no doubt require insurers to navigate different types of regulatory filings. They will also force discussions with their regulators on how to comply with other important sales process regulations, like New York Regulation 187. These are major changes to what they are used to doing, when in the environment of face-to-face consumer interactions using paper forms, but nothing suggested here is not doable if approached correctly.

In this atmosphere, the agent becomes a hybrid between:

  • Marketer/prospector and
  • Customer relationship manager

These changes are arguably more productive than booking and traveling, between as many face-to-face appointments as possible. 

The purchase process for the consumer at the same time becomes quicker.

When social distancing becomes a thing of the past, the distributor will still be working and financially secure. However, it will also have a whole new set of tools we can use to be even more productive and successful moving forward.

A financial and risk management challenge

On the financial side, imagine for a minute that COVID-19 experience suggests that the industry has not adequately priced “pandemic risk” into its product. To this point, it threatens the solvency of some less well-capitalized companies.

Less well capitalized companies, who have weighted their mix of business toward individual life insurance could be at risk.

  1. Traditional forms of mortality-based reinsurance will likely be more expensive and less available to carriers.
  2. Ratcheting down mortality risk retained will not be a viable solution for most.
  3. Insurers will have to work with their reinsurers to create and price different forms of reinsurance that isolate “pandemic risk;” just as the property-casualty industry has developed specialty risk products like umbrella coverages.

There may also be an opportunity to reassess statutes and regulations that currently address industry solvency risk.  The answer might be to base these tests on some adequate capital standard relative to the size of the insurer’s in-force block and the amount of new business it writes. 

According to this model, the insurer would be required to secure on its own or through its state guaranty associations a form of pandemic stop-loss mortality reinsurance, which could be more affordably priced and that it would pay for. 

This could adequately address regulatory concerns about the financial and solvency impact of a pandemic on companies, without direct government financial intervention or the disruption that would be caused by limiting an insurers ability to write new business based on capital levels.

Conclusion

One might argue that the COVID-19 crisis might be over in 6 months. So, why spend scarce resources addressing these issues when they might not be needed in a relatively short time? After all, the Spanish Flu epidemic happened in 1918.

On the other hand, in the last 20 years, we have seen MERS, SARS, and bird flu epidemics challenge our public health system. 

Insurers need to have the capability of continuing operations effectively in the face of pandemics as a matter of strategic risk management.  We do not know when the next pandemic will strike, but in a world that is increasingly interconnected, they will certainly continue to occur.  Regulators and the industry would be foolish to not learn a lesson from COVID-19.

At the financial services and insurance group of Practus, LLP we stand ready to work with forward-thinking life insurers and distributors. Assisting them in tackling the legal and regulatory hurdles and opportunities presented by the COVID-19 pandemic.  Moreover, given our deep industry experience and virtual firm model (using technology to replace brick and mortar firm overhead), we can deliver this service more efficiently than our competitors.

In the next blog we will address the issue of product suitability in a pandemic environment

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