COVID-19 has affected all industries and has spurred major — and immediate — need for change. Since we are facing a global pandemic impacting the lives of millions, pressure on the life insurance industry is significant.
Coronavirus has caused a large hit for life insurer stocks, due to the fact that the market expects a drop in interest rates to hurt insurers’ profit margins — but not, as you might think, because of an expected increase in mortality. It would take a much higher percentage of the population contracting the virus to drive major worry from a claims standpoint.
Despite the challenges, life insurance is still a key industry and product in this difficult time. Companies across the entire industry will have to adapt to the changing and uncertain market. There has been a spike in consumer demand across the industry, and it’s only continuing to rise. Insurtechs are better suited to tackle immediate and rising demand now, but all insurers must remain agile and technology-forward in order to evolve alongside real-time market factors in this unprecedented time.
Traditional Insurers Hit Hardest
Life insurance stocks have fallen further than the overall market in the past week due to life insurance companies’ large investment portfolios. The regulatory environment and conservative nature of life insurance means that life insurers have heavy exposure to bonds, and, as yields drop on things like Treasury notes, this puts additional pressure on profitability.
Traditional life insurers are additionally facing concerns about the persistence of business, analyzing if people will continue paying their premiums if the economy turns or if they’ll reallocate those funds for more near-term needs. During the financial crisis of 2008 and 2009, life insurers saw a temporary dip in persistency for this same reason.
Insurtechs Step Up to the Plate
Insurtechs like Ethos have seen an uptick in applications during COVID-19 concerns, due in large part to the way insurtechs process applications. With everything online, insurtechs are able to respond to the increase in applications much faster than traditional providers. Customers don’t need to leave their home to get coverage, and there’s no need to meet with live agents or visit a doctor. You can also receive your actual coverage far more quickly than with a traditional life insurance provider. This is why legacy insurers are choosing to either provide their own tools or partner with a technology provider to navigate this tricky time as fast underwriting remains key.
Both startups and traditional vendors who provide their own proprietary tools for underwriting are trying to make the business case for their tool to be more widely adopted as a replacement for traditional aspects of testing and underwriting (such as medical exams). For example, in some instances an older lab test can be located and transmitted to the insurer for review instead of relying on a “fresh” test – this would slow down the coverage timeline and require the customer to leave the house for a medical exam.
The state of the insurance industry is evolving quickly. We won’t know the lasting impacts of the industry until much further down the road. A massive spike in death claims appears still unlikely at this point (to date, evidence suggests that most individuals are expected to recover fully), but the industry is prepared should claims rise. Many companies model and plan for the impact of potential pandemics and adjust their balance sheets accordingly. Regulations require companies to hold significant reserves to manage any claims volatility, and the impact is further mitigated by reinsurers backing up carriers’ claims by taking on a portion of the risk.
Life insurance providers are continually assessing the situation and views are evolving in terms of how to respond. For example, some companies are asking if applicants have been diagnosed with COVID-19 or are seeking treatment for COVID-like symptoms. If so, applicants may be postponed for coverage until they test negative or symptoms resolve. However, the majority of applicants will see no difference in terms of their ability to qualify for coverage.
Additionally, many Americans rely on life insurance provided by their employers, and since many of those who will experience the most severe effects of the coronavirus are 70 or older, they wouldn’t likely be covered by these policies and therefore won’t hit the life insurance companies/insurtechs as hard.
Even so, companies are following COVID-19 progress and are taking steps to mitigate exposure. In addition to watching the trajectory of cases and monitoring mortality rates, the industry is also contemplating this pandemic from a practical standpoint to decide guidelines around how to cover new applicants. For example, some companies are postponing applicants who have recently traveled outside the United States. Many are also assessing the ability to get applicants examined during underwriting in a lockdown and their views on temporary insurance. Additionally, insurers are observing consumer behavior and persistency of policies, which means accounting for customers who will not keep their policy (and their payments) after this pandemic ends.
Life insurance as an industry will continue to adapt to the changes occurring from COVID-19 as it progresses over the next few months. Traditional insurers and insurtechs, and how they offer their product to customers, will not stay stagnant and will evolve everyday as we adjust to this new world.