Recently, there has been speculation that life insurance companies could be facing tough times as a result of COVID-19 and the associated financial crisis.
Even the Federal Reserve in its report on Financial Stability, which was updated May 2020, notes that, “Measures of leverage at life insurance companies […] were at the higher ends of their ranges over the past decade.”
Look in the space over this article for a graph from the Federal Reserve report. The graph shows how leverage at insurance companies has changed over time. You can see that these levels have consistently fluctuated from around 8% to 12% over much of the last 20 years.
Leverage was higher in 2004-2005 and again around 2008, so current levels would not seem to pose a major cause of concern for the industry, as a whole.
What about the Financial Crisis?
Since insurance companies invest primarily in bonds, the prevailing low bond yields over the last 20 years have been limiting. During the recent financial crisis, bond yields moved even lower, and now it seems that the Federal Reserve will continue an extended policy of low interest rates to boost the economy.
While continued low interest rates are not a reason for insurance companies to celebrate, it is important to consider that insurance companies of all types have been successfully navigating a low interest rate environment over the last 20 years.
A Silver Lining — Especially for Mutual Life Insurance Companies
Insurance companies with strong cash reserves experienced a window of buying opportunity during the recent downturn when relatively high-yield bonds were dumped on the market at low prices.
Many mutual insurance companies were in a great position to take advantage of this opportunity. For carriers that have made such a move and are willing to wait, it should prove a good decision as those bonds mature.
Obviously, stock-held insurance companies may have realized the same opportunity during this time, but stock-held companies tend to plan over shorter time periods than mutual companies, because they must make quarterly reports to shareholders.
Mutual insurance companies are free to plan over longer time periods — two to three years according to Andrew Rinn, a vice president at Ameritas — as they try to make the best long-term decisions for their policy owners. For this same reason mutual insurance companies tend to assume less leverage (debt) and to hold more cash than stock-held companies.
These factors make it likely that mutual insurance companies will realize the greatest benefits from the opportunity.
Underwriting through COVID-19
It has also been reported that “…some Americans are being turned down for life insurance.”
Obviously, some people will always be turned down for life insurance when they have health problems. Outside of this, I have not encountered any real-life cases of healthy individuals who have been turned down because of their risk of COVID-19.
Some insurance companies may postpone an underwriting decision if you have been traveling in a foreign country with exposure to COVID-19. Some companies are also postponing consideration of certain cases until an in-person paramedical evaluation can be safely scheduled and completed. This is nothing new, and of course it is reasonable.
Good life insurance coverage is still available from many different companies, so there does not seem to be any cause for concern. What has changed with many insurance companies is the introduction of a streamlined underwriting process.
With the lockdown rules, it has been challenging and sometimes impossible to schedule paramedic exams in a timely manner.
Recently many insurance companies have developed new systems for evaluating medical and lifestyle records in order to bypass the exam process for many new life insurance applications. This is a positive change. But the change was not initiated by the quarantine or COVID-19, as the industry was already moving towards a more accelerated underwriting process.
What About Mortality Experience From COVID-19?
In my research, one carrier who does a lot of business in New York state (an early hot spot for the virus) confirmed that it has seen an increase in the number of death claims due to COVID-19.
The increase was not significant enough to warrant changing reserve requirements or product design, and since the majority of fatalities from the virus have been among individuals with pre-existing health conditions, it is not likely that long-term mortality experience for the industry will be affected in a significant way.
The virus has largely caused pre-mature death for individuals who were already at higher health risk and were likely to die within the next decade even if they had survived the virus.
Currently, with the COVID-19 death rate in serious decline (even in the face of higher case counts), it seems reasonable to accept this logical conclusion.
Insurance companies that are conservative in their product pricing and carry high reserves should be in a strong position moving forward out of COVID-19 and the recent financial crisis.