Underwriting Among Early Effects Of COVID-19 On Life Insurance

COVID-19 has had the biggest short-term effect on life insurance in two ways:

1. Insurers extending grace periods for paying premiums.
2. Placing a greater emphasis on accelerated underwriting.

Those were among the insights from Nancy Bennett, senior life fellow with the American Academy of Actuaries. Bennett was among the presenters at a recent webinar describing how COVID-19 will affect insurance and retirement plans. She spoke with InsuranceNewsNet on the pandemic’s short-term impact on policy management and underwriting.

COVID-19 has prompted a number of insurers to voluntarily extend grace periods, while some states have mandated those extended grace periods. This creates a challenge for insurers, Bennett said.

“It’s one thing to say you have to set a grace period but then their systems would normally be set up to automatically process a policy lapse after a specified period of time. So they have to go in and make adjustments to their system so the lapse does not happen. And then there’s also the issue of, OK, the policy hasn’t lapsed but the premium hasn’t been received. So what do we do to the contract values and how is each company going to change or modify the contract values?”

Bennett said carriers could respond in a number of ways. Some companies may take out an automatic policy loan, other companies may reduce the face amount of coverage. Other carriers may take no action. “But they’re still going to receive the premium, only it will take a longer time to receive it,” she said.

Policyholder behavior also will be a challenge to life insurers, Bennett said. In addition to taking a longer period of time to pay premiums, policyholders are taking out more policy loans.

Accelerated Underwriting

Accelerated underwriting already was gaining traction in the life insurance world before COVID-19 hit, but the restrictions placed on nonessential medical treatment as a result of the pandemic have moved accelerated underwriting more to the forefront, Bennett said.

“Many life insurers are changing their criteria, as well as their process, for underwriting,” she said.  “A lot of this starts out with the fact that with many policies that are traditionally fully underwritten with full medical information, it’s really difficult because so many doctors are not available to provide a full medical exam or there isn’t a paramed who can go to people’s homes or offices to get the information.”

Carriers that already have an established accelerated underwriting in place may have an advantage in the current situation, Bennett said. But now carriers who didn’t have such a program in place have an incentive to implement or pursue one.

In addition to implementing accelerated underwriting, carriers also are taking a new look at risk, Bennett said. Many are changing their retention limits. “So if an applicant wants to take out a $2 million policy, for example, the insurer might say they only afford to cover, say $1.5 million and reinsure the remaining $500,000.”

Some insurers also are reducing the age at which they will issue coverage to an applicant, she said. “Maybe they've historically issued up to age 85 but not they are pulling back and only issuing up to age 80, for example.”

Bennett said some insurers are changing their applications to obtain more information on whether an applicant was exposed to COVID-19. “That's a little dicey because some states are a little skeptical of that or want to make sure there's an actuarial basis for asking these risk classification questions.”

These short-term changes serve two different purposes, Bennett said. “One is to adapt to the inability to do underwriting in the traditional manner, and the other is to limit their exposure right now to an applicant who may have greater exposure to COVID-19.”

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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