The variability of the mortality effect by age makes the impact of COVID-19 highly variable by type of insurer, according to actuaries from Willis Towers Watson.
Attempts to model the coronavirus have been challenging despite two months’ worth of solid data. The typical pandemic modelling methods (the SIR approach of splitting into the states of susceptible, infected, recovering, with age/gender-specific transition rates) is unfeasible due to the uncertainty of the spread assumption (R0) of a pandemic.
R0 represents how many individuals an infected person will transmit the virus to (in an otherwise perfectly susceptible population). An R0 parameter of one, for instance, equates to a stable state; a value greater than one (at the start of an outbreak) implies growth in infections, with the potential for exponential growth in the absence of interventions. Normal influenza spread has a parameter of two to three whereas measles is one of the most contagious viruses with an R0 of 12 to 16, said the article.
Various publications so far have COVID-19’s R0 ranging from 1.4 to over six, while even the World Health Organization’s (WHO) suggested range allows almost 100% variation (from 1.4 to 2.5). To further complicate matters, the effective rate of reproduction will differ between countries and also vary over time as people shift their routines to avoid infection.
The case fatality rate (CFR) of the coronavirus is also highly variable by location – from above 5% in Wuhan, to 0.7% outside of it. “Reporting and data issues add further uncertainty; even determining the number of cases is challenging, especially given the asymptomatic cases whose number cannot accurately be measured,” said the article.
The overall CFR in any country is likely to be heavily influenced by the availability of appropriate healthcare resources. However, the age variability seen so far is likely to be similar across countries.
Impact for insurers
“Clearly, annuity writers will experience an unusually high mortality year (even under the more benign scenarios). Protection writers will see a mortality impact likely to be of similar order of magnitude to their capital allowance for life CAT risk (for example, the Standard Formula of Solvency II sets this at 1.5 per mille, and internal model firms will have generally similar calibrations),” said the article.
The extent of these insurers’ reinsurance coverage will have a major impact as well. The main losers will be firms with large whole of life books but low levels of reinsurance, and there is likely to be a large amount of sum at risk for policyholders in their 50s and 60s, with a material mortality impact from the COVID-19 outbreak.
The article also noted that the outbreak occurred at the immediate end of most insurer’s financial year, giving them a few more months before finalising their revised assumptions for mid-year reporting.
“By this time, mortality assumptions are likely to increase, probably with a short-term adjustment, while annuity writers might find it reasonable to wait and see as far as base assumptions go, noting that they can be fairly aggressive this year with improvement assumptions,” the article said. M