COVID-19 impact on US life insurers' capital ‘marginal’ in base case scenario

Written by Adam Cadle

29/04/2020

US life insurance death benefit claims will increase as a result of the coronavirus pandemic, according to Moody’s, however if the total number of deaths remains within the rating agency’s projections, the uptick should represent a modest decline in capital from death benefits.

The base case scenario looks at deaths from infection rates with 2% at the low
end and 40% as an extreme stress scenario, while 10% is the high end base case. A 1% infection fatality rate is assumed, except for group policies, which tend to have exposure to working age individuals and hence lower mortality rates.

“For the US life insurance industry we are projecting $8bn of gross coronavirus-related death
benefit claims in our low base case, $40bn of claims in our high base case and $160bn of
claims in our stress scenario, Michael Fruchter, a Moody’s vice president said. “For context, total 2019 death benefits for the industry were $76bn.”

While life reinsurers are the most exposed to increased death benefits, the impact to capital levels from coronavirus-related deaths should be modest for direct writers rated by Moody’s. Direct writers estimated pre-tax losses do not exceed 10% in capital even in the high end base case scenario and do not exceed 40% of capital in the severe scenario. Based on the current success with social distancing, Moody's noted it is possible that death claims come in below their low base case scenario.

The type of product will determine the reserve offset. Short duration products such as group or yearly renewable term reinsurance will have the lowest reserve offset while whole life products at older ages will have the highest offset.

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