Can Life Insurers Cover All COVID-19 Death Claims?

Coronavirus

Will life  insurers be able
to  pay all the death claims attributable
to COVID-19 that come on top of claims for deaths not directly related to the
pandemic?

Triple-I chief economist Dr. Steven
Weisbart
says they can.

How many additional death claims will COVID-19 cause?

As of this writing, officially about 90,000 Americans have died
from COVID-19. In addition, there have been other deaths that seem excessive
relative to “normal” statistics in prior years, suggesting the COVID-19 numbers
are an undercount. It’s also
possible
that the “lockdown” imposed nearly nationally in late March,
April, and in part of May, added to the total through suicide, drug overdoses,
untreated conditions that would have been treated and managed in the absence of
the pandemic, and violence.

So,
let’s assume that, for the full year 2020, COVID-19 and related stresses cause
300,000 additional deaths. For simplicity, we’ll ignore any lockdown-related reductions
in deaths – from, for example, fewer traffic accidents, air pollution, and
other causes – that might be attributed to the pandemic.

Dr. Steven Weisbart
Triple-I Chief Economist

“It’s
unlikely that all the people who’ve died from COVID-19 had individual life
insurance, since many were age 60 or over,” Weisbart says. “Even if we assume a
third of these were insured – and, further, that two-thirds of younger people
who died also had life insurance – and that all these claims were in addition
to other causes of death, that would be 150,000 claims.”

In 2018, the latest year for which we have data, beneficiaries
under 2.7 million individual life insurance policies received death benefits.
So, although 150,000 additional death claims represent a large human toll, they
would be only a 5.6 percent increase over the 2.7 million baseline.

“That would result in total death benefits being paid to 2.85
million beneficiaries,” Weisbart says. “This is roughly the same as occurred in
2015 and well below the peak of 3.5 million in 2012.”

In other words, even with our conservative assumptions, paying the
additional deaths claims due to the pandemic is well within the industry’s financial
and operational ability.

Are Life Insurers Writing Less Business Because of COVID-19?

COVID-19 has changed many aspects of our lives, so it isn’t surprising
to see life insurance markets affected. But some stories create false impressions
that should be corrected.

The story that some life insurers are writing fewer policies “because of COVID-19” has gained traction in both traditional and social media. While not wrong, like other stories involving insurance and COVID-19, it requires context to keep it from wandering off into urban legend territory.

“Life insurers’ ability to keep their promises to policyholders
depends on numerous factors,” explains Triple-I chief economist Dr. Steven
Weisbart
.  “Among them are interest
rates and how responsibly insurers underwrite policies and manage their
investments.”

Dr. Steven Weisbart
Triple-I Chief Economist

Interest rates exceptionally low

What do interest rates have to do with life insurance? Many
products (whole and
universal life
and term life for 20 years
or more) calculate premiums in the expectation that, during the life of the
policy, the insurer will earn enough interest from its investments, net of
investment expenses and taxes, to help pay life insurance benefits. Many life
insurance and annuity policies – especially those issued 10 or more years ago –
guarantee to credit at least 3 percent per year.

“Efforts to stave off the recession spurred by attempts to ‘flatten
the curve’ of infections and deaths caused by the virus have led to
historically low interest rates,” Weisbart says.

Gross long-term rates on the investment-grade corporate bonds life
insurers primarily invest in had been 4 percent for most of the past decade and
plunged below 3 percent in August 2019. Since the onset of the pandemic, rates
have fallen even further (see chart).

“So, life insurers – who planned to profit from the ‘spread’
between the interest they earned on their investments and the interest they
credited on their policies – have lately struggled as this spread disappeared
and then reversed,” Weisbart says.

Options are limited

“So, that’s it!” I hear some of you say. “It’s all about rich
insurance companies protecting their profits!”

Businesses must make a profit to stay alive, and U.S. insurers – one
of the most heavily regulated and closely scrutinized businesses on the planet
– have the additional requirement to maintain substantial policyholder
surplus
to ensure claims can be paid. Life insurers, in particular, are
required to maintain a special account – the interest maintenance reserve
(IMR).

“The IMR is drawn down when net interest earnings are too low to
support claims – as is the case now,” Weisbart says. “If it’s exhausted, insurers
can draw down surplus, but they can’t draw too much because they’re required to
keep at least a minimum surplus to protect against adverse outcomes in all
other lines of business.”

If their investments aren’t performing as well as expected,
insurers have two options: write less business or charge more for the business
they write.

Exercising a combination of these options is what life insurers
are doing now.

“When interest rates eventually rise, the profitable spread will
return,” Weisbart says, and competition among insurers will likely lead to more
liberal underwriting and lower premiums. “But we can’t predict with confidence
when that might happen.”

Until then, life insurers are tightening their criteria for issuing new policies and, in some cases, raising premiums so they can deliver what they’ve promised their existing policyholders.