Outlook for products and pricing in 2021
28 Jan 2021
Vaccine rollouts across the UK and further afield have kickstarted 2021 with hopes of returning to some form of normality. 2020, however, will be remembered for the social and economic disruption, and sadly loss of life it has caused globally. Over the course of the past year, life insurers have implemented business continuity plans, adapted underwriting processes and reviewed the impact of COVID-19 on their products and customers. In this article we look at the potential impacts COVID-19 may have on life insurance products and pricing over the coming year.
The pandemic has prompted widespread changes in human behaviour; from an appreciation of the impact of smaller probability events to a shift towards a digital world, brought about by social distancing rules in many countries. This presents an opportunity for the life insurance industry as individuals become more aware of the value of life insurance and protection products. While “doomscrolling” (the act of consuming a large quantity of negative news at once) has increased during the last year, this may have acted as a catalyst for individuals to reflect on their financial needs and the impact events, such as redundancy, serious illness, or death, may have on themselves and their loved ones. With a heightened awareness and more time on their hands, people may assess whether insurance has a role to play in increasing their resilience against such adverse events. We’ve probably lost count of the number of Zoom calls we’ve been on but, with the increase in time spent online, policyholders may now be more amenable to digitally provided services. This has potential to influence how policyholders interact with the insurer; from buying policies online to interacting with chatbots for customer service support. These behavioural changes present insurers with new opportunities to reach a broader audience and tailor their products to meet changing customer needs.
Mortality risk changes
COVID-19 has had an immediate impact on mortality caused by deaths directly linked to the virus and those caused indirectly through delays in accessing both medical attention and treatment. However, the social and economic disruption caused by the pandemic will likely have longer-term impacts on mortality risk.
Unfortunately, mortality rates are likely to continue to be higher over the immediate future, but longer-term mortality is less certain. We may see a survivorship bias, where the surviving population are healthier, resulting in lower mortality rates. This could be driven by positive changes observed during the pandemic persisting, such as: increased exercise, reductions in smoking, reductions in air pollution, and increased hygiene. On the other hand, efficacy of the vaccine will be a key driver in controlling the virus and its long-term impact on mortality risk. For those infected, the illness may linger for some time resulting in “long COVID”, possibly causing long-term deterioration in health. There will also be the adverse knock-on impacts resulting from delays in cancer treatments and GP referrals owing to lockdown and a resource strained NHS.
To assess how the pricing of protection products may be affected, we have considered the mortality impact of three different scenarios; optimistic, central, and pessimistic.
- The vaccines are highly effective and quickly rolled out, resulting in COVID-19 being controlled
- Economy and personal spending recover
- Government increases spending on health and social care
Impact: Survivorship bias could be a predominant driver of the COVID-19 impact on mortality, resulting in a reduction in long-term mortality rates and subsequent improvement in profitability, which may be passed to the policyholders by way of premium reductions over the long-term.
- The vaccine is partially effective against new emerging strains, and vaccination is rolled out more slowly
- Deaths as a result of COVID-19 continue
- Medical and economic disruption ensues
Impact: With the virus remaining somewhat prevalent, mortality rates would be expected to be modestly higher than expected in the short and long-term. Morbidity rates would be worsened too, impacted by the medical disruption and the delay of treatment of cancer or other serious medical conditions. Both Life and Critical Illness products could see a reduction in profitability as a result; with some providers absorbing the losses while others may increase prices.
- The vaccine is not as effective as initially thought, or it doesn’t provide immunity against new strains
- Social distancing rules persist well into 2022
- Deaths as a result of COVID-19 continue
- More medical and economic disruption ensues
Impact: In this scenario, mortality and morbidity rates could increase even more as a direct result of COVID-19, or due to long delays in treatments. As profitability decreases for most protection providers, their pricing could increase or, in extreme cases, some products may be withdrawn temporarily.
The social disruption caused by the pandemic has had an immediate impact for some life insurance products. In particular, standard approaches to underwriting may not have been appropriate, nor feasible, and we have already seen some insurers announce modifications to their underwriting process. The pandemic may also have accelerated efforts to use GP’s electronic medical records in underwriting which could bring efficiencies by streamlining the underwriting process. Other innovations over the past year include enhancing additional services by replacing face-to-face consultations with virtual GPs and offering increased flexibility through premium deferrals. Last June, the FCA issued guidance asking firms to consider the impact of COVID-19 on product value, you can read more about this in our newsflash here.
Living through the pandemic, whether having had the virus or not, will also take its toll on policyholders’ wellbeing, both physically and mentally, so we may see insurers expanding their additional services to include online specialist consultations to further assist policyholders. Recent research has told us that COVID patients with underlying health conditions have been reported to experience complications post recovery, with a third making return visits to hospital1. This presents a challenge for insurers when assessing the individual’s risk at the underwriting stage, so we may expect to see COVID related questions, such as whether the applicant has had the virus and/or vaccine, introduced on underwriting forms.
Insurers are likely to observe changes in expense experience as a direct result of the pandemic. For some, this may be in the form of cost savings due to reduced underwriting capabilities at times where social distancing rules meant some medical exams were not possible. Equally, many will have incurred one-off costs as a result of rapidly digitalising services and processes. Given that these digital processes will likely remain in place, the overall long-term result may be a reduction in expenses due to economies of scale.
New business volumes
We have seen life insurers continue to write new business during the pandemic, although a very limited number of products were temporarily suspended due to difficulties in underwriting and the higher risk associated with short deferred period income protection policies. As many firms were forced to furlough employees last year, we saw a reduction in employee and employer contribution rates for retirement products. The prospect of economic recovery and more people returning to work could drive retirement contributions up this year. However reinforcing the importance of saving for retirement and adapting products to meet the changing incomes of policyholders will be important over the coming year.
Lapse experience is likely to differ by policy size. The economic impact of the pandemic has been uneven, and we are likely to see higher lapses for the self-employed and those in jobs more affected by social distancing measures and which often have lower sum assured bands. This has the potential to change the socioeconomic profile of books of business and future experience.
These are uncertain times that present challenges to life insurers on how to tailor their existing products to meet customer needs and remain competitive. Hymans Robertson has a wealth of experience in pricing and product design. We can assist you in reviewing your existing products and processes in order to meet customer needs in an ever-changing environment.