The Financial Crisis - A Matter of Life and Health?
Collapsed banks and government bailouts - the fall-out from the Global Financial Crisis (GFC) is well understood by most people. They’ve seen reduced or stagnant gross domestic product, low-interest rates, increased levels of unemployment and austerity measures that impact social investment and public health systems.
But seven years on, how should we gauge the less well-reported effect of the GFC on the life and health insurance sector?
A loss of confidence among consumers in financial institutions and long-term financial products seems inevitable, as well as reduced spending simply due to belt tightening. Both adverse effects would hit sales of savings and also protection products.
On the savings side, anyone looking for clues about the worst that can happen should look to Japan. Several Japanese life insurance companies failed between 1997 and 2001, forcing the Japanese government to step in as ultimate guarantor for the liabilities of the life insurance market.
Germany is another life insurance market where long-term interest guarantees for traditional endowment and (deferred) annuity products have been offered. The interest guarantees of up to 4% granted in the 1990s have yet to be fulfilled and, to ensure this happens, the regulator has introduced an additional interest reserve requirement, which adds up to more than €13bn for the years 2011 to 2013 already.
Meanwhile, life insurers are struggling to design savings products that are both attractive to customers and also profitable, prompting many to intensify their focus on reducing their operating expenses and deploy new asset management strategies.
The challenges faced by companies selling savings products in this low interest environment (in both senses of the word interest!) are not surprising. But could the GFC have also affected sales or profitability of protection covers? This could be worrying because underwriting profits from such lines of business are particularly important to insurers when investment income is volatile.
Looking at biometric risk, and the impact of socioeconomic status on mortality, a recent study of mortality trends in the male German population found that gains in life expectancy vary with the level of pension received. In fact, 65-year-old men receiving high pensions enjoyed an increase in their remaining life expectancy of nearly three years from the mid-1990s to 2007-2008, compared to less well-paid pensioners who gained only one year.
Occupation is another factor of socioeconomic status that affects mortality and is worth noting in the context of the drastic impact the GFC had on unemployment rates in many countries.
The influence of economic change is perhaps even more important in disability insurance. Gen Re’s research into the link between economic indicators and disability rates suggests that unemployment rates, the consumer confidence index (CCI) and the business confidence index (BCI) are linked to incidence rates for disability income business: A 1% rise in unemployment causes an uplift of 6% in disability rates.
Economic instability also affects the working population, notably due to insecurity over future prospects and the constant drive for increased productivity. Germany, for instance, has seen increased work absences due to mental health issues. These cases are more prone to evolve into long-term absences and hence have an impact on disability benefits provided both by the social security system and the private insurance industry. Not only claims management, but also product development, pricing and underwriting processes need to find new ways to address this shift in causes of disability.
It remains to be seen what the impact of austerity measures - especially cuts to health expenditure in different countries - will be on the business of life/health insurance companies. While insurance companies might face challenges within their existing offering, the upside of the GFC is the opportunity it presents to make a difference by filling the gap that the cuts to social security systems leave behind.
With simple and inexpensive health products offering security for worst-case scenarios, or simple term life products offering protection for dependant family members, the industry can make an essential contribution to addressing the challenges facing society.
To find out more about how the Global Financial Crisis is impacting insurers, read my full article in Risk Insights.