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Tax Rules Shape U.S. Life COVID-19 Impact: Fitch Analysts

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What You Need to Know

  • Life insurance claims have been higher in the United States because many U.S. insureds are over 65.
  • Because of tax rule differences, old U.S. residents are much more likely than older people in other parts of the world to have life insurance.
  • A successful COVID-19 vaccination effort could help reduce the pandemic impact.

Big life reinsurers are facing more COVID-19 claims in the United States than in the rest of the world, partly because of tax rules that encourage older U.S. consumers to own life insurance, according to analysts at Fitch Ratings.

Robert Mazzuoli, a Fitch director, and other Fitch analysts, studied the effect of the pandemic on five big life reinsurers in a new COVID-19 impact report.

COVID-19 has been deadlier for people ages 65 and older than for younger people, and, as of March, about 59% of the 530,000 U.S. residents who had died from the disease were 75 or older, the analysts write.

“Life insurance policies that include mortality covers are widely held by older age cohorts in the U.S., whereas mortality covers are hardly sold to older age groups in other regions,” the analysts say. “The key reason for this popularity is the tax treatment of financial income in the U.S., which favors life policies with mortality covers over those without.”

A Life Reinsurance Primer

Life reinsurers serve as insurers for life insurance and annuity issuers.

These companies may pay the “direct writers” when one very large life insurance death claim comes in, or when, because of an epidemic or other disaster, the total amount of death claims is very high.

Fitch rates five life reinsurers: Hannover Rueck SE, Munich Reinsurance Company, Reinsurance Group of America Inc. (RGA), Scor SE and Swiss Reinsurance Co. Ltd.

RGA is the only life reinsurer on that list with U.S.-based headquarters although all five have significant operations in the United States.

The performance of life reinsurers can affect the everyday life of life insurance agents and brokers, and their customers, because access to reinsurance is one of the factors that affect how much mortality risk life insurers can take on, and what life insurers charge to protect policyholders against that risk.

Life Reinsurers’ Pandemic

COVID-19 had killed about 2.8 million people around the world when the Fitch analysts completed their new report.

In spite of the enormous number of deaths, the effects of the pandemic on life reinsurers have been modest, in part because of the relatively small number of deaths affecting people with life insurance, the analysts write.

At big life reinsurers, U.S. claims have averaged about $5 million to about $25 million per 10,000 COVID-19  deaths reported for the entire  U.S. population, according to the analysts.

RGA could be facing $15 million to $25 million in claims per 10,000 U.S. population  COVID-19 deaths, the analysts estimate.

Even at RGA, however, 2020 COVID-19 claims amounted to only about 6% of net premiums earned, and all of the life reinsurers were profitable in 2020, the analysts say.

This year, the analysts say, the pandemic impact may depend partly on how quickly the COVID-19 vaccination campaign moves, and how well the vaccines protect people against strains of the virus that causes the disease.

(Image: National Institutes of Health)