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Impact and considerations of pandemics on U.S. insurers

Background and history

This is not the first time in history that the world has been exposed to this type of situation. There have been several pandemics that have impacted the world. One article listed pandemics by year and included the source, as seen in Table 1. Some of these pandemics are still lingering and according to NAIC information, influenza pandemics have shown to be the most prevalent experiencing about three every century.

Pandemic coverage used to be an add-on to an insurance policy or just another stress testing actuaries would include but has recently become a reality and not just a statistic. Historical pandemics and including the number of deaths associated with the incidents can be viewed here and provides insight into the severity of pandemics. The timeline ranges from 165 A.D. to the publication date of the article. However, as of May 26, 2022, research has confirmed 6,283,025 deaths globally. The same research has also confirmed 527,338,359 global cases of COVID-19 with the United States at the top of both data sets in terms of those impacted.

Summary of COVID impact

So, why should examiners care about insurers and the impact of past pandemics? While it is a nice history lesson on plagues, flu, and other diseases that developed into a pandemic it also should influence how insurers (and regulators) consider the risks, both unique and consistent with past pandemics, present during the current COVID-19 Pandemic.

Before discussing the impacts of the COVID-19 Pandemic on different types of insurers; it is important to note that the pandemic is a “speculative” risk for insurers. The nature of this speculative risk varies depending on the type of insurers and the lines of business written; though positive outcomes have resulted from the pandemic; whether changing risk profiles, policyholder behaviors, and new risks requiring coverage. Below are a few considerations for some of the major lines of insurance and the impact that COVID-19 has taken on those sectors.

Property and casualty insurance


  • Auto policyholders driving less during "shut down" periods; resulting in less incidents and covered losses
  • Reduction in claim frequency for auto claims
  • Growth opportunities for pet coverage
  • Increase in premiums due to cost of supplies (e.g., lumber)
  • Decrease in benefits being paid out for workers' compensation


  • Lost wages of policyholders changes living arrangements; thus eliminating the need for coverage
  • Additional exposure and increase in pet-related claims
  • Increase in severity for auto claims
  • Refund premium or large discounts
  • Reduction in premiums and non-payment of premiums from job loss
  • Increase in lawsuits against insurers
  • Ancillary coverages were essentially non-existent due to "shut down" periods
Life insurance


  • Decrease in reserves and expenses related to long-term care as there was an increase in morbidity which eliminated the need
  • Increase in preventative care which assisted in reducing expensive procedures and large claims


  • Increase in life insurance claims payments
  • Reduction in or non-payment of premiums or terminated policies due to job loss and financial difficulties
Health insurance


  • Due to the decrease or temporary halt in elective care procedures, health insurers were able to offset some of the financial pressures
  • Overall increase in fee-for-service payments


  • Health insurers triggered CAT coverage events across the nation
  • Increased utilization, frequency and severity of claims to treat COVID-19
  • Lingering effects and continued spike in cases

Risk considerations

In general, almost all insurers have seen similar pain points. At first, it was somewhat of a guessing game as to how COVID-19 would impact insurers and what would be identified as real risks versus hypothetical risks. As time passed the industry realized what was initially considered a short-term phenomenon was intensely becoming a pandemic. As we became more aware we had to incorporate additional risk considerations. These additional risks considered the lessons learned from history as well as current observations within the insurance market during the current pandemic period. A few general considerations for the key functional areas (KFAs) are discussed below and should not be considered a complete list as each company should be evaluated on an individual basis.


  • The company may experience a decline in new and/or renewal premiums due to job loss and financial difficulties in policyholders causing additional solvency concerns.
  • The company may experience difficulties in the retention of members or policyholders, due to unemployment, affordability or a decrease in disposable income causing additional solvency concerns.
  • Collectability of premiums from policyholders has increased exposing the company to additional credit and solvency concerns.
  • Mandatory refunds to policyholders or reduced premiums could cause solvency concerns.


  • The company may experience an increase in the severity of claims as individuals are taking more risks causing liquidity concerns. (observed in automobile insurance claims).
  • Company may not be able to contain the expense ratio due to the increase in frequency and severity of health claims due to COVID-19 and increased susceptibility to other diseases. (The increase in medical cases had a domino effect on the utilization of hospitals and providers. Frequency and severity were also considerations for life insurers due to the increase in deaths.)
  • The Company may experience increased exposure in concentration risk due to spikes in infections related to geographical locations.


  • Companies may experience increased impairments on investments due to the economical struggles of the underlying companies causing a strain on investment income.
  • The company may experience a decline in the value of investments and overall portfolios causing a decline in the overall quality of the portfolio and a decline in RBC health due to the related risks.
  • The company may experience a decline in investment income due to a low-interest rate environment.


  • Costs continue to rise for reinsurance and may become unaffordable for companies to carry the appropriate reinsurance coverage. (Reevaluating reinsurance strategy and insurers willing to retain more risk to reduce costs.)
  • The company may be exposed to additional uncollectible reinsurance receivables due to the increased use of unrated or lower related reinsurance providers to contain reinsurance costs.


  • Insurers are not appropriately calculating reserves, due to the fluctuation in COVID-19 cases and the residual impact causing a solvency issue(estimation of certain reserves has become more of a challenge).
  • Aggressive reserving assumptions based on reduced severity/recovery from pandemic may cause reserve deficiencies.

Capital and surplus

  • Insurers may experience reduced access to additional capital due to an economic recession and inflation.
  • Due to the reduced premium and increase in claims, insurers are experiencing increased liquidity demands causing a strain on surplus.

Consistent for all insurers is the requirement to change and become more reliant on digital means and services. These services range from virtual medical appointments, digital or virtual sales and virtual underwriting, or more of an automated underwriting process. Examiners and insurers were forced into being more dependent on technology. While not considered a KFA, IT has a segregated review during the initial phase of an examination. Examples of risks that were required to be immediately addressed and continue to be risks are below (not all-inclusive):

  • Cybersecurity as companies and regulators were forced to work remotely and build/fully utilize a remote work environment
  • Strengthening a business continuity plan
  • Ensuring and strengthening virtual private networks (VPN), cloud connections and other access points for remote workers
  • Encryption services for data and enhanced data protection
Pandemic strategies

As we became accustomed to living in the post-pandemic environment insurers will need to create tactics to reduce the impact of COVID and future pandemics. In an article published by the NAIC in February of this year, there are a few strategies to consider:

  1. Companies should strengthen their business continuity planning by investing resources into testing disaster recovery plans and business continuity plans in advance of another pandemic.
  2. While not a new approach to investing, increase portfolio diversification to reduce exposure to risks accelerated by the pandemic. We should challenge the asset manager to be more forward-looking into the portfolios they manage and consider situations directly impacted by the pandemic. Diversification should be evaluated for not only investment type or a particular industry but also accounting for longevity. For example, a life insurer may have an opportunity to develop a type of strategy to hedge against the influx of deaths or health insurers for the long-tail residual effects of COVID and an increase in the short-term expenses for preventative care such as testing. “They also can diversify into other product lines less sensitive to pandemic risk.”
  3. An additional existing approach is investing in additional reinsurance. Reinsurance is already a known tool to reduce risk exposure and could be utilized to transfer a specific category of risk from the insurers' books. As with any reinsurance transaction, the transfer of higher exposures can assist with a more predictable revenue stream and allow the insurer to write more business if desired. The most common types of reinsurance for the pandemic were excess of loss and stop-loss treaties.
  4. A final managing tool was purchasing pandemic insurance. These tend to be too costly for smaller companies and have limited availability. In most circumstances, since pandemics have been historically uncommon, a one-in-one-hundred-year event, there is not much data related to the risks and are difficult to price.
Concluding thoughts

From the initial shock and impact of COVID-19 and entering a pandemic to the current environment, the insurance industry has had to adjust and our approach to related risks has had to keep up with additional exposures and continued risks. The NAIC has taken steps to implement additional considerations for pandemic risks. Regulators are likely to suggest to companies that more robust stress testing and include pandemics and other catastrophic events to assist in determining capital adequacy. It is now common to ask companies if they have a formal process in place to deal with pandemics and what is the capability to efficiently and effectively work in a remote environment.

As we continue to evolve our practices and considerations the regulators must understand what a company’s process is when faced with a catastrophic event, what resources are available, what additional funding is accessible and what is a realistic plan. Regulators have to understand how to evaluate insurers' plans and if there are appropriate strategies in place and if are there other ways to mitigate against future financial implications.

For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.

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