U.S. life insurance death benefit claims from COVID-19 could range anywhere from $8 billion to $160 billion, Moody’s Investors Service said in a new report.
However, if the total number of deaths remains within the credit rating agency's projections, the uptick should represent a modest decline in capital from death benefits.
Moody’s base case scenario looks at deaths from infection rates with 2% at the low end and 40% as an extreme stress scenario, while 10% is the high end base case. A 1% infection fatality rate is assumed, except for group policies, which tend to have exposure to working age individuals and therefore have lower mortality rates.
While life reinsurers are the most exposed to increased death benefits, the impact to capital levels from COVID-19-related deaths should be modest for direct writers rated by Moody's. Direct writers estimated pretax losses do not exceed 10% in capital even in the high end base case scenario and do not exceed 40% of capital in the severe scenario. Based on the current success with social distancing, Moody's noted it is possible that death claims come in below their low base case scenario.
"For the U.S. life insurance industry we are projecting $8 billion of gross coronavirus-related death benefit claims in our low base case, $40 billion of claims in our high base case and $160 billion of claims in our stress scenario, Michael Fruchter, a Moody's vice president said. "For context, total 2019 death benefits for the industry were $76 billion."
Other highlights of the Moody’s report include:
Life reinsurers most exposed to increased death benefits. The hit to capital from COVID-19 death benefits should be modest for rated direct writers. For most companies that Moody’s rates, pretax losses are expected to be below 1%-5% in the base case and below 20% in the severe scenario. Life reinsurers are most exposed to a pandemic, although companies that are subsidiaries of larger entities could benefit from parental capital support.
Reserve offset depends on product; highest for whole life which has most exposure at older ages. Moody’s expects the reserve offset would be lowest for short-duration products like group and yearly renewable term (YRT) reinsurance and highest for whole life products at older ages. In its analysis, Moody’s applies a 30% reserve offset for individual life and a 5% offset for group life insurance.
Longevity risk offset expected to be relatively small; companies with payout annuities and pension risk transfer should benefit most. Some companies will have an offset to their mortality exposure in their longevity risk business. For example, the liability for pension risk transfer and payout annuity businesses will be reduced if fewer people survive in any given year than had been expected. However, the estimated reduction in reserves is relatively low compared to Moody’s estimates for additional industry death claims.
Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.
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