Health insurers and life insurers know that the virus that causes Covid-19 pneumonia could lead to more claims.
The people who write, market and sell annuities are starting to think harder about how a large disease outbreak in the United States, such as a severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) epidemic, could affect them.
- A collection of Society of Actuaries documents related to pandemic risk is available here.
- A tool for viewing National Center for Health Statistics mortality data is available here.
- An analysis of pandemic risk prepared by Steven Weisbart for the Insurance Information Institute is available here.
- An article about Weisbart’s analysis is available here.
Here are five possibilities, based in part on papers actuaries and economists wrote in the early 2000s, in response to concerns about what might have happened if the 2002-2004 severe acute respiratory syndrome (SARS) outbreak had not been contained so well.
1. Fear-related turmoil could hurt annuity issuers’ investment returns.
Annuity issuers use trillions of dollars in corporate bonds and other fixed-rate investments to support their products.
In the past few weeks, investment market turmoil has pushed the Federal Reserve Board to cut interest rates, in an effort to calm investors, and to encourage them to put fewer assets in bonds and more in stocks.
2. Covid-19 pneumonia and other SARS-CoV-2-related conditions could kill some annuity beneficiaries.
The famous 1918 flu pandemic was deadlier for working-age people than for older people.
The Chinese Centre for Disease Control and Prevention reported that, as of Feb. 11, the death rate for patients hospitalized with confirmed cases of SARS-CoV-2 was less than 1% for people under 60, 8% for people ages 70 through 79, and 15% for people ages 89 and older.
3. An increased death rate for older people could reduce ordinary annuity benefits obligations.
Steven Weisbart, an economist, wrote in a pandemic risk paper published by the Insurance Information Institute in 2006 that a pandemic might reduce obligations related to immediate annuities, or annuities designed to pay streams of income immediately, and increase the profitability of immediate annuity product lines.
4. An increased death rate might not be that helpful for typical annuity operations.
Jim Toole, an actuary, wrote about the possible effects of pandemic risk on annuities in May 2007, in a paper posted on the website of the Society of Actuaries.
Toole noted that issuers may have to pay assets out if the annuity holder dies while still paying cash into a contract, rather than drawing income out.
Another challenge for the insurer is that many contracts contain features, such as guaranteed minimum death benefit provisions, requiring the issuer to pay benefits out even if a beneficiary who is already receiving annuity income dies, Toole wrote.
He wrote that, overall, life insurers’ annual statements tend to give little information about how a pandemic might affect their annuity obligations.
5. A large outbreak could affect some states more than others, and issuers with concentrations of business in certain states more than others.
Influenza and pneumonia killed about 59,000 people in the United States in 2018.
Here’s a table, based on data from the U.S. Centers for Disease Control and Prevention’s National Center for Health Statistics, that shows how many people died from flu and pneumonia in each state and the District of Columbia; what the age-adjusted flu and pneumonia death rate was per 1,000 residents; and how the death rate for flu and pneumonia compared with the death rate from all causes.
The flu and pneumonia accounted for about 2% of the United States’ 2.8 million 2018 deaths, overall.
In the typical state, the age-adjusted death rate for flu and pneumonia was 1.4% of the age-adjusted death rate for all causes of death.
The table shows that, on an age-adjusted basis, in a normal year, seasonal flu, flu-related pneumonia, and other types of pneumonia tend to kill more people in the Appalachian states, the central states, and Nevada than in the New England states, the Southeastern states, or the West Coast states.
|Deaths caused by flu and pneumonia||Age-adjusted flu and pneumonia deaths per 1,000 residents||Age-adjusted deaths, for all causes of death, per 1,000 residents||Share of deaths caused by influenza and pneumonia, adjusted for age|
|District of Columbia||79||0.1||7.2||1.4%|
— Read U.S. Life Insurers, Stocks Shook Off the 1918 Flu, on ThinkAdvisor.