Health Insurance Outlook Optimistic; Life Insurance Challenging

By Susan Rupe

U.S. health insurers will likely remain profitable despite the uncertainty surrounding COVID-19 and its financial impact, Moody’s Investors Service said in a new report. However, U.S. life insurers could face some financial challenges, the analysts said in a separate report.

Health Insurers’ Outlook Optimistic

In looking at health insurers, although Moody’s had an optimistic view of their financial situation, the analysts cautioned that health insurers could experience lower revenues, tighter cash flows and declining enrollments as a recession emerges from the COVID-19 pandemic.

"We devised three scenarios to assess possible impacts from the coronavirus: mild, medium and severe, with assumed infection rates of 2%, 10% and 40% of the US population, respectively," vice president – senior credit officer Dean Ungar said. "While developing these scenarios we factored in assumptions regarding infection rates, testing rates, and outpatient versus inpatient needs."

The scenarios were further broken down to factor inpatient needs by intensive care unit, ICU with a ventilator and non-ICU admittance as well as outpatient services such as telehealth and urgent care amenities. Moreover, these were assumptions were customized for each customer type. For example, hospitalization rates for the Medicare population were significantly higher than those of non-Medicare patients, as COVID-19 has had a much more severe effect on the elderly.

In the mild scenario – with an infection rate of 2% - the insurers could see a benefit to earnings in 2020 as use of medical services falls sharply because most of the insured population remains at home. In the medium scenario - with an infection rate of 10% - health insurers stay solidly profitable before factoring in the impact of a recession.

Moody’s found that medical costs related to COVID-19 are partly offset by lower usage and annual premium repricing. Since March 15, 31 states have stopped elective surgeries. Beyond these official bans, utilization of medical services not related to COVID-19 is down significantly.

Meanwhile, health insurance policies are renewed annually, and this renewal allows companies to recover, even if it takes a few years.

Moody’s found regional commercial-focused insurers are most at risk. The more commercial risk-focused, regional health insurers have more earnings risk in the medium and severe COVID-19 scenarios than the national, diversified companies. However, this increased earnings risk is at least partially offset by high levels of excess capital. These companies also maintain substantial levels of cash and short-term investments in their operating companies to pay claims.

A recession will reduce commercial enrollment, partly mitigated by higher Medicaid and individual enrollment, Moody’s said. With an unprecedented spike in unemployment, commercial enrollment is sure to drop, reducing revenue. Administrative services only clients, especially in industries or areas most affected by the pandemic, could have trouble reimbursing the health insurers for claims, tightening cash flow. These pressures would be partly offset by increased enrollment in Medicaid and the individual market, especially for those newly unemployed individuals qualifying for subsidies.

Life Insurance Outlook Challenging

Life insurers are challenged by a lower-for-longer interest rate environment, especially at the long end of the U.S. Treasury curve, Moody’s reported. The low interest rate environment continues to reduce earnings of interest-sensitive products.

“There is also the risk of more sizable charges on a statutory accounting basis as insurers review the viability of their long-term investment return assumptions, especially related to long-duration products with recurring premiums to invest such as long-term care and universal life with secondary guarantees,” Manoj Jethani, a Moody’s vice president said. “An increase in defaults or a sharp drop in returns from alternative investments could also pressure some insurers to reduce return assumptions.”

Moody’s said life insurers’ capital levels are strong but are vulnerable to COVID-19-driven shock. Insurers recorded a 5% increase in total statutory capital and surplus in 2019. For 2020, growth in statutory capital will likely be reduced – and possibly reversed – by volatile equity markets, low interest rates and credit deterioration. On top of that, although Moody’s said they don’t expect it to happen, they cautioned that a widespread COVID-19 infection rate with a relatively high mortality rate for the insured population would cause higher death benefit claims than currently anticipated.

Expect dividends to decline, Moody’s said. In 2019, life insurers increased their share repurchases and grew dividends. But for 2020, Moody’s expects life insurers to pull back on repurchases and dividends to preserve operating company capital due to the uncertainty of the COVID-19 pandemic and the escalating chances of a severe economic recession.

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.