Spanish Flu had been considered to be the worst case reference point for epidemics based on the low-level of health care in the early 1900’s and that countries were just coming out of four years of world war. The extent of international air travel and globalization of trade are problems that weren’t even in the picture during the Spanish Flu epidemic. What are today’s variables that will impact the 2021 Insurance Industry?
Pandemic Over in 2020
Covering the cost of Covid-19 testing and treatment with cost-sharing waived could mean health insurers spending as much as $251 billion in 2020 for just Covid-19 patients. Legally insurers can’t just hike up their rates for 2021 based on costs in 2020. Rates have to reflect expected costs in 2021. Dave Dillon, a Dallas-based insurance actuary who is a member of the Society of Actuaries says, “…for the majority of health insurance issuers, premiums would not be expected to increase as a result of Covid-19-related costs, if the pandemic is limited to 2020.” Of course, when the pandemic will be under control is still an unanswered question.
For actuaries to predict Covid-19 cases for the 2021 insurance industry they do plausibility modeling called SRI: susceptible, infected and recovering with age/gender-specific transition rates. Even with two months of data this information is not clear. Actuaries also model a spread assumption, called RO, which represents how many individuals an infected person will transmit the virus to. Flu has an RO of 2 or 3 while one of the most contagious virus’, measles, has an RO of 12-16. Willis Towers reports that Covid-19 has an RO from 1.4 to over 6, but with great differences by country and over time as people shift their routines to avoid infection.
Case fatality rate (CFR) estimates are around 2% but there is wide variation. CFR is impacted by availability of appropriate health resources (ventilators, anyone?) with age variability being more consistent across countries.
Willis Towers reports, “One material mitigating point from an insurance perspective is that Covid-19 will disproportionately affect the less healthy, people already with chronic conditions, hence the mortality impact does not consist entirely of new deaths but will include a material proportion of accelerated deaths leading to corresponding reduced mortality in later years.” A nice way of saying the 2021 insurance industry will experience cost savings from less healthy people expiring earlier than expected due to coronavirus.
Even though insurers can’t legally hike up 2021 insurance industry rates based on costs in 2020, if insurers have to dip deep into their capital reserves to cover the cost of the coronavirus, they may actually have a legal obligation to increase rates so they can build those reserves back up for the next emergency. So, catastrophic increases in 2020 claims, paying more for care than usual due to waiving of co-pays, the chronically ill dying earlier, and the economic crisis leading to a larger number of people unable to pay premiums could all negatively impact insurer’s capital reserves.
Elective Surgery Postponement
There are three types of postponement, easily postponed, a very urgent need postponed and the tricky ones in-between. Insurers could see a surge in elective surgeries in the 2021 insurance industry and they could price their premiums to reflect that. On the other hand a decrease in other claims as people stay away from the hospital and doctors to avoid the coronavirus might help insurers weather this pandemic leaving their reserves stronger heading into 2021. “Many insurers are receiving significantly lower call volumes, which is considered a key predictor for future claims,” Dillon says. “Therefore, it appears that 2020 Covid-19-related losses may be offset by reduced spending in other areas in the short term.”
Insurers were ignored in the first round of stimulus bills passed by Congress. Insurance industry trade groups have asked Congress for a risk mitigation program that would be triggered only if an insurer suffers real financial losses because of the pandemic. The motivation for Congress to consider this is if insurers get spooked by the exorbitant costs of the coronavirus, they might decide to pull out of individual insurance markets, leaving entire areas of the country uncovered.
Reuters.com says insurers are experiencing a double whammy – a sharp rise in payouts at a time of big investment losses. In an ideal world, actuaries want to wait for near-certainty in the data before changing any of their major assumptions. Unfortunately, the ideal approach may not be an option for the 2021 insurance industry.
Interested in conducting a job search or hiring to build your staff? Contact Smith Hanley Associates‘ Actuarial Recruiting Practice Lead, Rory Hauser at [email protected].