The New Normal

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Article Authored by Robert Hebron

Our “New Normal” has become a rapidly moving target during the COVID-19 pandemic

 

Since I started writing this blog series in late March, the subject of how the COVID-19 pandemic will affect the U.S. life insurance industry has become somewhat of rapidly moving target.

As I sit here today, it has become very clear that this crisis will not be over until the country gains herd immunity. This can take place in one of two ways:

  • Over 80% of the population will need to become infected and recover gaining immunity in the process
  • Acquiring an effective vaccine and achieving close to universal vaccination throughout our population  

It seems to be extremely unlikely, that either goal will be achieved in the next few months or until at least next year.  In the meantime, some form of a modified version of a lockdown will have to be employed to restrict the development of hot spots and protect vulnerable members of the population.

This raises two very important points that companies and distributors must ask and answer:

  1. Old Lawyer WayCan they survive financially and deliver a product to the consumer, while operating in today’s restricted marketplace? If not, what is the strategy (change product, consumer interaction, etc.) for the organization, allowing them to continue to be economically vibrant and produce needed growth?
  2. Can they mitigate financial and other risk management issues in the interim, doing the least amount of damage to their long term infrastructure?  A one and a half (1 ½) year focus, solely on reducing mortality and interest rate risk at the expense of all other considerations, may or may not succeed and could produce lasting damage.

What we do know:

Damage will definitely take place with any effort trying to maintain company infrastructure, that is built to manage a level of new business consistent with past experience and plans. This will be is especially difficult with new business goals that are not achievable while the pandemic is still being fought.

Board of Directors or Investor Group

Every responsible Board of Directors or Investors Group will be asking for a plan, due to the length of time companies will be faced moving through the “new normal”. 

A multi-disciplinary approach to forging a plan will be a firm requirement.  For many smaller companies, this will be a very difficult lift.

Industry Groups

I would suggest industry groups like ACLI and AALU (subject to antitrust considerations) should be working on a best practices plan, as well as, a legislative agenda to see the industry through the pandemic and prepare it to withstand the threat of future pandemics. 

The Alternative

The alternative is a hope for the best and “go at it yourself” approach that may expose the industry to economic Darwinism.  Given the way that our guaranty fund structure operates, there will be no winners so long as there are losers.

Some of the topics for good risk management and business continuation plans should include:

  • Model the financial impact of increased mortality caused by COVID-19.
    • The impact should be associated with COVID-19 deaths, as well as on the financial impact of increased equity market volatility and low-interest rates. 
    • This will allow for the basis of other critical analytics. 
      • For instance, estimating increased mortality due to COVID 19 allows assessment of the protective underwriting value of underwriting processes that could effectively screen out this added mortality. 
    • Allowing management to effectively choose between pricing in some extra mortality or insisting on underwriting testing that consumers may not be willing to undergo.
    • One counterpoint to consider in making these assessments, watch the volume of new applications and their abandonment rate.
  • Analysis of the impact.
    • The analysis of changes in financial markets would allow management to better understand:
      • When to raise non-guaranteed charges, on in-force policies
      • Which guarantees to lower and what priority to place on this action on new business
  • The aforementioned analysis should.
    • Allow for proper evaluation of reinsurance options and their pricing. 
    • Allow for proper assessment of capital adequacy in a “new normal”.
    • This will provide the necessary information to allow the company, where appropriate, to get a head start on raising capital, if needed, in the most efficient way available to it.
  • The financial analysis and the steps taken to address.
    • Allows an insurer to perform an operational analysis, examining the effect of the pandemic on the role and productivity associated, with its field force and back-office operations.
    • Understanding the following risks posed to agents and employees performing their jobs in a pandemic and post-pandemic environment, will all be key decision points for management:
      • How is consumer behavior being affected?
      • What changes are consumers demanding?
      • How are consumers interacting with the company, its employees and agents?
    • By answering these questions, the company can decide on where retraining, redefining roles and right-sizing various areas based on the financial and operational analysis is appropriate.
  • Assess steps for the company to protect itself.
    • New legal environment
    • Regulatory environment
    • Legislative environment
  •  Understanding the pandemic’s impact on financial growth and other business goals.
    • Adjusting those goals appropriately
    • Devising new business plan initiatives

Human Resource Issues

  1. Determining which employees should continue to work remotely indefinitely; and
  2. The extent to which others should be reintroduced into an office environment; and
  3. Under what circumstances that reintroduction should occur.

A thorough review of the items mentioned above will provide the Board of Directors with the minimum necessary information to discharge its duties appropriately and meet its legal responsibility for the company and its shareholders.

The end goal is simple

Seeing that the company has an appropriate business continuation plan for what becomes the “new normal”.

 

 

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