As we settle into 2023, what’s on the cards for UK insurers and reinsurers, after a year of ‘permacrisis’? Ruolin Wang assembled four industry professionals to discuss the six main spin-off challenges. Where might be the wins? What might be the best strategies?
It promised hopes of economic recovery and emergence from Covid, but last year brought the invasion of Ukraine, raging inflation and possibly the beginning of a recession. The UK had three prime ministers, a gilt crisis, public sector strikes and, according to the health secretary, England’s worst flu season for a decade. No wonder the Collins English Dictionary’s 2022 Word of the Year was ‘permacrisis’.
So how has all this impacted on UK insurers and reinsurers? Niall Fallon and Robyn Tully of Reinsurance Group of America met up with Blair Sievering and Lisa Balboa of Hannover Re, UK Life Branch, to give The Actuary’s Ruolin Wang their perspectives.
1.Covid
Excess deaths have impacted all age groups
Direct Covid-related deaths in the UK have fallen since the first quarter of 2022 and are now far below the peaks of early 2020 and 2021. Nevertheless, overall mortality is still elevated across the population. According to the Continuous Mortality Investigation, there were more excess deaths in the second half of 2022 than in the second half of any year since 2010.
Two likely key drivers for this are strain on the NHS and post-acute sequelae of Covid. Government data on England’s excess deaths indicates that a large portion are due to cardiovascular-related disease, which may be caused by either or both of these factors. Some preliminary studies, such as Raisi-Estabragh et al.’s ‘Cardiovascular disease and mortality sequelae of Covid-19 in the UK Biobank’, suggest that individuals who have had Covid may have increased risks of stroke and heart attack.
This heightened mortality can be observed broadly across the population, says Fallon. While the working-age population seems proportionally more affected than the over-65s, excess deaths have impacted all age groups. There is less evidence of socioeconomic disparity than there was with Covid, according to the Office for Health Improvement and Disparities.
As a result, we might expect the overall effects at population level to be roughly translatable into an insured portfolio (plus any impacts of underwriting for individual business).
Despite the mortality increase, the individual protection market has generally seen price reductions compared with pre-pandemic terms. The extent is product-dependent, but some price comparison portals are reporting that overall life cover market rates are 5%+ lower than three years ago. In a time of heightened mortality claims and high expense inflation, this is difficult to rationalise. Yield increases, particularly for level benefits, will have a part to play, but key drivers appear to be increased automation, operational efficiencies and reduced profit margins, according to Fallon, after reviewing UK companies’ financial statements.
2.Morbidity
Future morbidity outlook is a mixed picture, shaped by drivers including medical progress and pressure on health services
Morbidity has seen the opposite trend to mortality – at least superficially. Blair Sievering says that actual critical illness claims have often been below what was expected when compared to pre-pandemic expectations. The consensus is that this is a delay rather than a reduction, driven in many cases by postponed screening and diagnoses.
For example, breast cancer screening was essentially paused in England in March 2020, and uptake was lower once programmes resumed. In written evidence submitted to the Health and Social Care Parliamentary Committee, Breast Cancer Now shared its estimate that around 1.2 million fewer women in England were screened for breast cancer between March 2020 and May 2021 compared with pre-pandemic levels; this could have led to missed or delayed cancer diagnoses. There have been similar issues with other cancers.
Other NHS indicators can also help insurers understand the extent and evolution of the healthcare disruption, for example:
- Time from urgent GP referral to first consultation appointment
- Time from ‘decision to treat’ to ‘first treatment’
- Ambulance waiting times.
Some insurers may be holding additional reserves in anticipation that morbidity claims will catch up in the next few years. In fact, reduced screening could result in it being less likely that conditions will be detected early, reducing opportunities for early intervention and resulting in heightened disease severity. In critical illness products with severity-based definitions, claims may therefore be larger when they do catch up.
Covid sequelae can also impact critical illness claims. In addition to heightened cardiovascular risk, research such as Goerttler et al.’s ‘SARS-CoV-2, Covid-19 and Parkinson’s Disease – Many Issues Need to Be Clarified – A Critical Review’ and Zarifkar et al.’s ‘Frequency of Neurological Diseases After Covid-19, Influenza A/B and Bacterial Pneumonia’ state there is some preliminary evidence that Covid may increase the risk of certain neurological conditions.
At the same time, Sievering points out, medical progress is being made in relation to disease diagnosis and treatment. There has been some accelerated drug development (including for long Covid, obesity and ageing) and increased medical funding in certain areas (such as the UK government’s pledge to provide additional funding for breast and lung cancer screening).
Taking these factors together, the outlooks for mortality and morbidity are perhaps not as bleak as they may seem in the short term.
3.Cost of living
Concerns over persistency and new business volumes have not yet materialised
The pandemic might have highlighted the value of insurance to consumers, but the cost-of-living crisis is likely making it harder for some to take out new protection policies, or even maintain existing cover.
The potential for higher lapses due to affordability pressures is on the industry’s radar. Anti-selection can be a concern when lapses rise – we would expect healthier policyholders to see less value in their policies than those with health conditions. One way to control lapses is to offer more flexibility, such as premium payment holidays. The industry offered these during the pandemic to support customers in financial need, and flexibility is becoming the market norm. Another growing initiative is the offering of ‘modular’ critical illness products that give customers more flexibility in terms of how comprehensive their policy is, and therefore more control over cost.
Concerns over persistency and new business volumes have not materialised so far. While there was some reduction in sales in 2022 compared with 2021, it was not to the extent that one might expect, given the economic backdrop. One explanation is that while inflation is high, UK unemployment has remained stable for the past year, according to ONS figures.
It is worth zooming in on two distribution channels: mortgage advisers and banks. During periods of sharp interest rate rises, Tully argues, we would expect more of mortgage advisers’ time to be taken up by re-mortgaging and less by protection. This might be driving the reduction in sales, suggesting the reduction is temporary – customers will still need protection in the long run. For banks, the move to a ‘hybrid’ world has challenged their face-to-face in-branch sales model. In response, bancassurers are focusing on improving their digital protection proposition for existing bank customers, and investing in digital distribution tools and platforms – sometimes with the support of reinsurer expertise.
The economic context may also come with a different kind of cost. After the 2008 financial crisis, the UK experienced an increase in suicides, with Barr et al.’s 2012 study ‘Suicides associated with the 2008-10 economic recession in England: time trend analysis’ indicating that there were approximately 1,000 excess suicides in England between 2008 and 2010.
Government support will be crucial in preventing a repeat. However, the insurance industry should not be a passive or reactive observer, Balboa says. During the pandemic, the industry increased its deployment of ‘auxiliary services’, such as mental health and other telehealth support services, and these can continue to support consumers.
4. Interest rates
Individual annuities are back, with market annuity rates increasing by as much as half
A more cheerful by-product of rising interest rates, Fallon states, is that individual annuities are back on the table, with market annuity rates increasing by as much as 50%. Having struggled to compete with drawdown products since pension freedoms were introduced, the individual annuity market has grown materially since 2020, with sales up and insurers reporting significant increases in new business.
The demand for bulk purchase annuities is also up, as pension schemes’ funding rates increase in the rising rates environment. Tully notes that several insurers now have ‘small scheme’ arrangements with reinsurers, whereby reinsurance cover is automatically activated when the insurer onboards a small-to-medium-sized scheme. Although larger transactions attract the headlines, these automated, operationally efficient reinsurance solutions can accelerate pension risk transfers for the large volume of smaller schemes in the market.
Reinsurers are also essential in taking risk and capital burdens off insurers’ balance sheets, and this is set to continue. The theme from respondents to the UK government’s 2022 Solvency II consultation was that even the proposed 60-70% reduction in risk margin would not lead to meaningful reductions in their use of longevity reinsurance. However, Sievering points out that this picture will evolve with the run-off of transitional measures on technical provisions until 2032.
Funded reinsurance is a particular area of growth. Compared with traditional longevity swaps, in which reinsurers take on longevity risk only, funded reinsurance transfers both longevity and market risks to the reinsurer, freeing up capital and capacity for the cedant.
Given the size of defined benefit liabilities, however, the insurance and reinsurance markets will need to continue raising capital and increasing capacity, and new entrants may emerge. Recognising the increasing use of funded reinsurance and the growth of bulk purchase annuities in general, the Prudential Regulation Authority has indicated it will review these areas this year.
Something to watch when it comes to protection reinsurance is whether rising yields will change preferences regarding risk premium and level premium in reinsurance premium structures. For level reinsurance premiums, rising yields may release pricing pressures, as average claim duration tends to be higher than average premium duration. Despite this, the overall reinsurance rate outlook is uncertain due to upward mortality and morbidity pressures.
Looking under the bonnet, rates will also impact capital and liquidity management. In a high cost-of-capital environment, insurers that can be more capital efficient through, say, diversification or reinsurance arrangements are likely to be more successful. The significant rise in rates in a relatively short period should prompt insurers to review and possibly recalibrate their asset liability management strategies.
Liquidity management is also ascending the priority list for many insurers. In the past, when rates were stable or falling, it was relatively easy to raise cash by selling fixed-income assets. When rates rise, there is a higher risk that losses will be realised. Insurers need to be more deliberate in their liquidity management, and use other tools such as reinsurance financing transactions.
5. Consumer Duty
We need to ensure we reach a range of potential customers, not just the ‘most valuable’
In July 2022, the Financial Conduct Authority introduced a ‘Consumer Duty’ to its Principles for Businesses: “A firm must act to deliver good outcomes for retail customers.” This will impact insurers throughout the policy lifecycle, including, for example, which customers to target sales towards, the sales process, underwriting, and engagement with existing customers. For example, if an insurer was trying to understand which policyholders would be most valuable to attract, under Consumer Duty they still need to ensure good access for a diverse range of potential customers (not just the ‘most valuable’).
While new regulation creates more work for practitioners, the industry has supported the principle as something that will strengthen its reputation and improve consumer outcomes; in fact, it may lead to increased protection sales in a more direct way. In the context of financial advice, particularly relating to mortgages, it would be difficult for an adviser to justify not having a conversation about protection.
6. Technology
Insurtechs can act as enablers at the various different stages of the insurance value chain
Insurtechs can act as enablers at the various different stages of the insurance value chain New technologies and innovative uses of existing technology are helping the industry navigate this complex and changing market, with insurtechs playing a large part. “Historically, ‘insurtech’ was often used to describe a new entrant that competed against incumbents, usually with a direct-to-consumer (D2C) business model,” says Balboa. However, the perception of insurtechs as largely D2C has changed, and it is clear that they can add value in every part of the value chain – from legacy system integration to policy administration, to distribution, to customer engagement.
They can be partners to existing players, rather than competitors.
There are signs that insurtech funding is slowing relative to the start of the pandemic. This could be due to the market downturn and heightened uncertainty, together with investors raising hurdles as yields rise. As insurtechs emerge in different parts of the value chain, investors are also forced to think more carefully about where to invest. As we write, the fall-out from the collapse of Silicon Valley Bank also continues to evolve.
Despite these challenges, the industry is not short of innovative solutions. In the new business process, digital distribution technology can help optimise conversion rates for existing distributors, such as banks, by helping agents to identify and cater for customer’s needs. Once the right product is identified, technology can facilitate an underwriting and onboarding process that’s efficient for the insurer, and also seamless and low in cognitive load for the customer.
In-force management is another growing use case. In addition to more traditional technologies such as fraud detection and claim automation, insurers are increasingly offering ‘auxiliary services’ to customers, Balboa says. Here, wearables and related policy add-ons are moving from the fitness world into the mainstream, helping policyholders improve their health – providing, for example, earlier detection of heart arrhythmias and sleep apnoea. Other technologies such as transdermal optical imaging are providing insights into people’s chronic disease risk.
These services could allow insurance to go beyond just financial protection. By incorporating services that support customers, insurers can improve their loss ratios through morbidity and mortality reductions – and help customers to live longer, healthier lives.
Ruolin Wang Solutions manager at Schroders
Niall Fallon Senior vice president, head of protection UK & Ireland at Reinsurance Group of America
Robyn Tully Business development actuary at Reinsurance Group of America
Blair Sievering General manager of business development at Hannover Re, UK Life Branch
Lisa Balboa Business development manager at Hannover Re, UK Life Branch
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