COVID-19 (coronavirus) is rampaging throughout Italy: more than 5,500 Italians are testing positive every day, according to The Guardian, and movement has been severely restricted throughout the country. Italy seems to have become the epicenter, but the rest of Europe is also considering the ramifications of this frightening pandemic.

How will coronavirus ultimately impact life insurers in Europe?

The Actuarial Post published a commentary by DBRS Morningstar, a global credit ratings business, on how DBRS Morningstar expects coronavirus to affect the life insurance industry:

 The key highlights include:
(1) The impact on insurance claims is expected to be manageable, given the relatively low mortality rate for infected individuals;
(2) The adverse reaction of financial markets to the coronavirus outbreak may affect insurers’ profitability, including earnings generated from their investment portfolios; and
(3) Insurers operating in higher-risk countries are seeing some disruption in their day-to-day operations, which will likely have an impact on revenues

Tough Dilemmas

DBRS Morningstar’s viewpoint is a hopeful one considering the scope and impact of the virus, but European life providers will still face some tough decisions.

Many niche income protection products emerged last year. These so-called permanent health insurance plans are issued by life insurers and provide for replacement of income should an individual be unable to work due to accident or sickness. Some have been focused on a particular need, such as paying the rent, and these plans have been popular throughout Europe. But the insurers who issued them will now receive an avalanche of claims they likely did not anticipate this early in the product lifecycle. How will they offset this loss?

The increasing popularity of “over 50” insurance products has enticed many insurers to tap into this market across Europe. We now know this is the demographic most likely to die from coronavirus, which is one of the reasons Italy has been so hard hit. This fulfils the noble purpose of insurance – to protect the vulnerable, but as with niche income protect products, there will likely be many more claims than expected at this stage.

Typically, an insured has to survive for at least two years from the issue date before a death claim is admitted. What happens if large numbers die before that (18 months, for example)? Will European life insurers run the risk of damaging their brand and negatively impacting their business to avoid paying out what is not normally a huge amount? On the other hand, where will this money come from if profit margins are set to narrow?

Part two of this blog post “The Dilemmas European Life Insurers Are Facing” will be released tomorrow…

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