Financial Fundamentals – Impact Of Covid-19 On Group Insurance
A little Perspective…
Just over a year after the first Covid-19 case was confirmed in South Africa, the number of cases in the country has exceeded 1.6 million.
We have had two distinct waves of infections and deaths during that time, with a third potentially on the way. We have also seen an increase in cases due to the 501.V2 variant, raising concerns around the ease of transmission and severity of Covid-19 as well as the potential efficacy of current vaccines.
Our country has endured the different levels of lockdown, with restrictions that have had a devastating impact on our economy and businesses regardless of the size. Many businesses have had to reduce salaries of employees, with some having to retrench them, just to remain open.
Despite these realities, insurance companies continue to manage the Covid-19 storm as effectively as possible to stay financially resilient while ensuring that they continue to pay valid claims.
Impact Of Covid-19 Risk Factors On Death Benefit Premiums.
To match premium income with the expected cost of claims over the next year, the rates need to be reviewed once a year. If there is an extraordinary change in the factors influencing the risk over the year, such as Covid-19, rates must be adjusted accordingly.
Although policies provide for interim premium increases between review dates, some providers deliberately decided not to use this provision and instead, chose to accommodate clients by using the reserves set aside to pay claims. Even though reserves are there to assist temporarily in adverse times, it is not sustainable to continue absorbing excess claims due to Covid-19 from reserves alone. Providers’ main purpose is to manage a healthy group insurance pool, so that they can continue to pay all valid claims into the future. To do so, it is critical to increase death benefit premiums accordingly to accompany the reserves set aside to cover future claim costs.
Premium rate changes will be different for each scheme, based on the schemes membership profile and past claims experience (if credible). In general, schemes with an older membership base may see bigger increases compared to schemes with a younger membership, as the Covid-19 mortality risk increases by age.
As mortality risk returns to lower levels, or if the number of deaths unexpectedly drops significantly, underwriters will review the claims experience and schemes could see a reduction in premium rates with the next rate review.
Impact On Other Benefits
Aside from the significant impact of Covid-19 mortality risk, it is believed that there could be secondary impacts on disability and critical illness risks. Factors such as long Covid and a poor economy may have negative impact on future disability claims experience. We believe it is too early to understand the full impact, but we continue to monitor claims experience for any signs of this.
What Can We Expect In The Next 12 Months?
Based on industry research and consultation with reinsurers, we expect to see a third and possibly fourth wave before the end of 2021. This is also the general view shared by government and the life insurance industry. Given all the uncertainties around the next waves, it is difficult to base the future impact on the group insurance industry on a single scenario. Underwriters have therefore modelled various scenarios of future waves to determine possible cost impacts of future excess death claims.
Modelling future excess deaths in relation to the first two waves resulted in a wise range of costs from 30% to 120% above expected. They remain cautiously optimistic about the supply and impact of vaccines on South Africa and therefore expect that future death claim costs will be on the lower end of the modelled range.