Saturday 15 January 2022
Models with 20,000 scenarios
Corona presents life insurers with arithmetic puzzles
The higher mortality rate as a result of the corona pandemic alone will cost life insurance companies two billion euros more by the end of September 2021 than in all of 2020. But it is difficult to adjust the premiums – also because of the Omicron virus variant. Only one thing is certain for the industry.
A coronavirus that lasts five years, a pandemic every ten years, or increasingly contagious variants – these are scenarios that life insurers will have to calculate with in the future if they want to calculate the risks in their books. At the beginning of the Covid-19 pandemic, the focus was still on payments for the cancellation of major events or closed factories, but in the second year of the crisis an increase in deaths was noticeable among insurers and reinsurers – especially in the USA, South Africa and India. The pandemic is overturning many of the assumptions that corporations have used to calculate their premiums. “We definitely paid out more than I had assumed at the beginning of the year,” admits Klaus Miller, member of the Hannover Re Executive Board.
After nine months, the life division of the world’s third-largest reinsurer had corona provisions of 404 million euros – in 2020 it was only 160 million euros. World market leader Munich Re has increased the estimate for its corona damage in life insurance for 2021 to 600 from 400 million euros. Industry-wide, higher mortality from the COVID-19 pandemic cost life insurers $5.5 billion by the end of September, up $2 billion from all of 2020, according to insurance broker Howden. The industry had expected a decline this year thanks to the vaccines.
But because the delta variant of the virus was increasingly affecting younger unvaccinated people, insurance claims rose. For the old people who were hit in the first wave, the policies were often paid off long ago. At the Dutch insurer Aegon, which does two-thirds of its business in the USA, the corresponding losses in the Americas region tripled in the third quarter. Actuaries assume that the industry will have to reserve more capital for pandemics in the future.
Look into the crystal ball
But the omicron variant, which appears to be more contagious but less deadly, makes it even more difficult to look into the crystal ball of the risks the industry must be prepared for. Narges Dorratoltaj from the company AIR, which specializes in risk models for insurers, doesn’t just calculate with more or less transferrable variants. He also tries to answer the question of whether governments around the world are willing to impose lockdowns in the future to keep the contagion in check – and whether citizens are still willing to comply with restrictions. According to the reinsurer Swiss Re, it takes 20,000 scenarios into account in its constantly updated risk models.
AIR’s risk modelers calculate that Covid-19 will keep the world busy for a total of five years. This fits with the statements of vaccine developer and Biontech partner Pfizer, who assumes that the virus will not become endemic before 2024. That’s how long Covid-19 could still cause excess mortality – like the flu virus does with more violent outbreaks every winter.
Risk experts from the insurance industry assume that pandemics will become more frequent: due to increasing mobility, urbanization, but also because of mosquito plagues due to climate change. “A new coronavirus outbreak is likely in the next ten years,” says Brice Jabo from risk modeler RMS. He points to Sars and Mers that have afflicted the world over the past 20 years.
Chief scientist Bruno Latourrette from the French insurer SCOR does not believe that the next pandemic will be as bad as Covid-19. “It doesn’t get any worse than Covid: with a risk of infection before the infected person feels symptoms themselves, a mortality rate that is not too high to trigger drastic countermeasures, dwindling immunity and high transmissibility.”