Abstract
Life insurance profitability depends on reliable mortality risk projections and pricing. While the COVID-19 pandemic has caused disruptions around the world, this is a temporary mortality shock likely to dissipate. In this paper, we investigate the long-run impact of COVID-19 on life insurance profitability. Due to the long-run dynamics of the mortality characterised by a decreasing effect of the COVID-19 mortality acceleration, we suggest proactive mortality risk management by implementing prompt premium adjustments, in order to increase the resilience of the business.
Highlights
Aside from the social and health consequences of COVID-19, the pandemic has led to economic and market shocks
Due to the long-run dynamics of the mortality characterised by a decreasing effect of the COVID-19 mortality acceleration, we suggest proactive mortality risk management by implementing prompt premium adjustments, in order to increase the resilience of the business
The pandemic phenomenon has a non-material impact on the profitability of annuity contracts as it has an instant impact since in a pandemic event there is an increase in mortality only in the first years of the contract and for medium and long-term contracts such as annuities, post-shock mortality quickly tends to mortality without considering the COVID-19 effect
Summary
Aside from the social and health consequences of COVID-19, the pandemic has led to economic and market shocks. The future financial cash flows could be affected by the uncertainty and pessimism due to the pandemic, the spillover effect of the overall decline in the market, leading to investors’ herd behaviour to negative abnormal returns. From the operational management point of view, insurers are responding to the widening pandemic on multiple fronts as health insurance, non-life and life offices, some classes of business being most exposed to coronavirus and adversely impacted. Small adjustments in the life business offering correspond to increases in mortality risk perceived from insurers as modest in the short run, by implicitly assuming no effects in the long-run perspective. Understanding the impact of future structural improvement scenarios, as well as increased short-term mortality combined with heightened attention to social and health care improvements in the longer term will allow life insurance offices to maintain profitability.
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