In March 2020, the entire world was grappling with the enormity of the coronavirus pandemic. Its effects rippled into other markets, including insurance markets. Decreased driving led to widespread auto insurance rebates within weeks, often with premium reductions of 25% or more. Debates emerged on whether the pandemic was a covered loss under business interruption insurance.
The life insurance market is a likely candidate for such adjustments. Term life insurance guarantees payment of a death benefit during a specified time period, such as 10 or 20 years. Increases in overall mortality risk should lead to increases in premiums or decreases in offerings (a form of universal rejection). Given that the primary function of the life insurance market is to correctly forecast mortality risk, the response could be sharp and swift, due to both direct effects from Covid-19 and indirect effects from other changes in behavior.
The direct effects from Covid-19 disease depend on its overall spread, lethality, and duration. Overall spread rests upon changes in human behavior due to personal choice or public compliance with government nonpharmaceutical interventions (NPIs), such as social distancing, increased hand washing, and staying at home when sick. The lethality of coronavirus was established with early evidence from mainland China, where estimated infection fatality rates were orders of magnitude higher for older adults compared to younger adults. At the same time, some early seroprevalence (the level of a pathogen in a population, as measured in blood serum) surveys claimed unmeasured infections were at least 50 times higher than measured infections, inevitably leading to the conclusion that coronavirus might not nearly be as deadly as thought. Lethality would also depend on the success of therapeutics, such as monoclonal antibodies and antiviral drugs, and as well on hospital capacity to treat sick patients. Indirect effects are potentially important as well. Although there are a handful of reasons why health might improve (e.g. fewer car accidents, less pollution, less spread of influenza), health reductions from declines in preventative care and deteriorating mental health would be expected to be major factors for mortality.
We recently explored the reaction of life insurance markets through October 2020. We analyzed how life insurance companies changed their pricing and offerings in response to Covid-19 using monthly data on approximately 800,000 term life insurance policies from 95 distinct companies. We used event-study methods that exploit well-established variation in the Covid-19 mortality rate based on age and underlying health status. Despite the increase in mortality risk and significant uncertainty, we found limited evidence that life insurance companies increased premiums or decreased policy offerings due to Covid-19. Overall, the analysis shows that life insurance companies generally did not respond to the changes in mortality risk by increasing premiums or reducing policy offerings for those who experienced the greatest change in mortality risk (older and less healthy individuals). However, we did find evidence that policies with the lowest prices did differentially increase premiums for policies offered to older individuals. This implies that the lack of an overall response is caused in part by market competition. In addition, we found that policies offered to the oldest of the old (age 75+) were more likely to be removed from the market. Since new purchasers of life insurance taper off drastically among individuals above 60, with very few new policies initiated for individuals older than 70, the overall effect of these removals was thus minimal.
Why the muted response? Mechanically, life insurance market responses are forecasting that the overall mortality effects of the pandemic—both direct and indirect, in the short-term and longer-term—are small. This forecast likely arises from two key factors. First, the virus has spread far less than initial models with uncontrolled spread might have suggested. Although Covid-19 disease is a serious health event, steps such as NPIs and voluntary changes have sharply reduced the likelihood of getting the infection. Second, such forecasts must estimate the duration of the pandemic, which critically relies on the likelihood of successful vaccines. As of December 2020, it appears that widespread vaccine availability will emerge in 2021, with a priority on the most vulnerable, mitigating losses in human life and suggesting that insurers’ failure to raise prices implied an accurate forecast of mortality risks.
© Timothy Harris, Aaron Yelowitz, and Charles Courtemanche
Timothy Harris is assistant professor of economics at Illinois State University, USA.
Aaron Yelowitz is professor of economics at the University of Kentucky, USA.
Charles Courtemanche is associate professor of economics at the University of Kentucky, USA, and a Research Affiliate of IZA.
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