Legislative possibilities for the life insurance industry in a post COVID-19 world
In prior blog posts, I pointed out that the COVID 19 pandemic has profoundly impacted the life insurance industry in two ways:
- Increased consumer interest in the product leading to increased demand; and
- Industry concern over heightened mortality risk due to the disease’s actual and potential death toll.
Unlike the Spanish flu epidemic of the early 20th century, the industry today has tools available to it that may allow it to both meet increased consumer demand and manage its financial risks appropriately. Several of these were discussed in my last blog.
However, for the still non-believers in this thesis, I would offer the following commentary. Many industries have been seeking federal and state legislative relief from the effects of the pandemic. Some point at the current environment as a political lobbyist’s full employment program.
Here are several legislative possibilities, that could enhance the industry’s ability to successfully seize this opportunity and surmount its challenges.
Make the product more affordable even with the increased mortality risk posed by the pandemic.
Clearly, the industry will need to pass on the increased mortality risk it takes on for pandemic events. This effect is only heightened if, as previously suggested, underwriting processes need to change to lessen reliance on face-to-face consumer encounters. However, that is not to say these pricing impacts cannot be offset by other innovations and/or legislative solutions.
On the underwriting side, medical exams could be forsaken in favor of:
- Ensuring that the insured has a primary care physician and has a history of having a periodic physical examination at an interval in line with generally recommended medical advice,
- With appropriate consent pulling the insured’s pharma records from a database, and
- Use of a follow-up good health statement that is executed online at or just before policy delivery.
On the legislative side, I date myself by recalling that back in the 1980s and before policy loan interest was deductible within certain constraints, for federal income tax purposes. Restoring that tax deduction for policy loans used to pay premiums, could significantly lower the after-tax cash outlay for the consumer’s purchase of the desired amount of life insurance coverage.
Legislative relief to pricing pandemic risk.
After 9/11, the property-casualty industry sought and obtained government assistance in covering terrorism risk. The federal government became the reinsurer of last resort on this risk to stabilize the reinsurance marketplace.
They were limiting carrier and reinsurer total liability for a single terrorist event, at a manageable level from a pricing perspective.
A similar approach could be taken for life insurance pandemic risk. The government could either do this directly or through state guaranty associations. The latter path would force the industry to share the overall pandemic risk.
They would charge companies a fair price in the form of an assessment based on life insurance market share in a given jurisdiction. By sharing this risk across the entire industry, the impact on a particular policy’s price should be minimized. This would virtually eliminate the concept of industry winners and losers once a pandemic occurs.
Offsetting the impact of a prolonged period of lower interest rates and higher hedging costs.
Perhaps the most immediate financial impact of the current pandemic on life insurers, has been the drop in returns on fixed-income investments they make with premiums received and increased hedging costs precipitated by equity market volatility.
State insurance laws and regulations governing minimum policy guarantees will need to be adjusted. They need to reflect the current interest rate environment, where Treasury debt is now being priced with negative inflation-adjusted interest rates.
Also, companies should be encouraged to lower floors and increase charges, to cover the cost of hedging on indexed universal life products. So long as increased equity market volatility accompanies a pandemic, along with raising or instituting disclosure requirements for consumers on this point.
Modernize policy form filing statutes and regulations and laws governing other purchase processes.
Given the current hodgepodge of state laws and regulations governing policy form filings, an effort should be made at the NAIC and form filing compact level. This effort should ensure wide adoption of secure electronic signature technology for policy applications, underwriting record acquisition authorizations, replacement regulation compliance, and policy delivery documentation.
The agent can still supervise the process using virtual meeting technology. Regulators should also clarify, that producers can use this technology to conduct suitability inquiries under federal securities laws and N.Y. Regulation 187.
In a time of extended social distancing and stay at home lockdowns, the industry has seen larger than expected abandonment of the policy application and purchase processes that previously have relied on face to face contact between the consumer and agents and medical examiners.
The industry needs to move quickly. It needs to both adapt its way of doing business and seek government assistance where necessary, to ensure that it meets its goal of serving the life insurance customer, while prudently managing risk and pricing integrity. Again, some challenges must be met but the opportunity is great. Wise legal and governmental affairs counsel is a necessary skill set needed to navigate the choppy seas the pandemic has created.