Underwriting in the Covid-19 Age
As the pandemic continues to rattle the world, we see a glimpse of hope with the introduction of vaccines that are effective against COVID-19. While we all hope to return to “normal” in the near future, the reality is, for most of us, our definition of normal has evolved. Some of the changes experienced remain constant for the foreseeable future, as it would be difficult (and unwise) to lose sight of experiences over the last nine months.
As the largest reinsurer of individual disability insurance (IDI) in the U.S., Munich Re Life US is studying the current effects of the pandemic on our clients and the industries we reinsure. We continue to closely monitor the insurance landscape and adjustments made across industries to gain insight into potential long-term implications. We share those insights with our clients to help them maintain profitability and growth through this time of uncertainty, and into recovery.
In this article, we’ll examine underwriting disability and provide a perspective on underwriting considerations that should be top-of-mind as carriers support policyholders and contemplate adding new risk to portfolios in this evolving landscape.
This article examines underwriting disability and provides a perspective on underwriting considerations in this evolving landscape.
As we underwrite disability coverages, it is important to look very carefully at the industries most impacted by COVID-19 when assessing new businesses for coverage. Many industries and occupations have been negatively affected by the pandemic and correlating recession. We recommend that carriers review these risks critically and/or avoid offering coverage when prudent. Requests for new or increased benefits also become more important, and should draw greater scrutiny by underwriters, as many workers were impacted by short-term cuts in salary. Additionally, standard features take on a new importance, such as “covered earnings” since this is sometimes calculated using averages over periods of time. Finally, some older group policies enable a claim to be incurred solely through the loss of earnings of a defined threshold (i.e., 20%). While a loss of duties is required, it becomes more desirable to file a claim when you’ve already experienced a loss of income.
Below are observations on recent activity across five industries frequently reinsured. Note, three of the industries discussed contain a large percentage of high wage earners (legal, medical, commercial real estate), which can significantly impact disability earnings.
Commercial Real Estate
It goes without saying that the global pandemic has severely impacted the commercial real estate industry. Commercial real estate agents face challenges as the appetite to purchase and lease commercial buildings continues to wane.1 There are two key factors contributing to this decline: the trend in shopping by click (online) versus shopping by brick (in store), and the ongoing corporate shift to working from home. Are high-rise buildings feasible in an environment where a virus can have such an impact on the economy? We anticipate incomes and activities in this field will continue to be challenged moving forward – including microeconomies that surround the business centers such as cleaning services, catering, office supplies, goods and services. There is a potential bright spot, however, as some buildings are being creatively repurposed. Business Insider notes that newly vacant properties are now being leveraged as logistics and fulfillment centers, apartment complexes, health clinics, public housing and homeless shelters. 2
Lawyers and Law Firms
As the lockdown has continued, businesses such as law firms that rely on client income and spending are at risk. An ABAJournal article noted that law firms never shared the economic pain of prior financial crises; yet this time, they’re being forced to consider various cost-cutting measures.3 Many firms are protecting their bottom lines by implementing pay cuts (approximately 20%-25%) and furloughs.3 And, while some firms are beginning to show signs of recovery, volumes remain at 30% below pre-pandemic rates as recently as October.4 For group disability or individual disability underwriters, now is not a great time to aggressively add legal risks.
Doctors and Medical Practices
It’s no surprise that hospitals and physician groups have taken on the heaviest burden over the last nine months, as they care for patients who have contracted the virus. Their heart-wrenching stories of heroism are shared by media outlets on a daily basis across the country. Despite increasing activity in hospitals, however, the pandemic has caused many Americans to delay non-urgent care – which decreased the need for services provided by specialists and private practices. A survey by The Physician’s Foundation on COVID-19 revealed 8% of physicians have closed their practices a few months into the pandemic, with that number expected to rise to 12% by mid-2021.5 In addition, physician burnout has been a concern for disability carriers for years. The current environment has exacerbated physician burnout, with nearly 58% of physicians stating they have feelings of burnout compared to 40% in 2018.6
A retail apocalypse had already begun, as online shopping rates skyrocketed in recent years. This trend was also accelerated by companies that filed for bankruptcy following financial challenges – including J. Crew, Lord & Taylor, J.C. Penney, Lucky Brand, and Brooks Brothers.7 Publicly announced bankruptcies, coupled with a risk of contracting the virus in enclosed places, has led to a reduction in overall pedestrian traffic and a troubled future for shopping malls.
The education sector was required to quickly adjust traditional ways of learning to incorporate more remote learning or in-person models that aligned with regulatory guidelines around school openings. As a result, responsibilities in education have changed as legal guardians support teachers in establishing a sense of normalcy in both virtual and in-person environments. Additionally, there are smaller communities that depend on college and university attendance to fuel their local economies, support the livelihood of local housing, restaurants, athletics, research and entertainment businesses. 8
Underwriter Considerations for Impacted Industries
COVID-19 has led to suppressed growth across various industries, with the decline of income levels and the elimination of jobs. As disability sales personnel continue to pursue these challenged businesses for coverage, what underwriting considerations should be top-of-mind as carriers support policyholders?
First, do no harm! Think twice about increasing your exposure on current risks by not increasing maximum benefits – and not liberalizing other features within current plans. Examine the motivation of an employer or individual policyholder with a critical eye to understand why they are looking to make changes to their current plan or, deciding to increase benefit amounts or features. This is even more critical for off-policy anniversary requests to increase coverage. Although it may be challenging, underwriters should apply the same logic on IDI new business submissions. For example, why would underwriters consider removing a mental illness cap from a group case or offer Guarantee Issue IDI, with unlimited mental nervous coverage to impacted industries, in this current landscape?
More robust analysis is warranted while exploring the long-term impact to these, and other, industries going forward.
Additional underwriting considerations and recommendations include:
High-income considerations (legal, medical, commercial real estate):
- Price more conservatively.
- Anticipate that there will be winners and losers in this industry; however, it is too soon to tell by geographical area or particular firm.
- Be reluctant to enhance current benefits such as higher maximums or higher income replacement levels until this market levels out.
- Financials should be reviewed for all large health systems, as those experiencing hardships tend to reduce staff (i.e. medical industry).
Considerations for all industries:
- Exercise conservative pricing and additional underwriting scrutiny for industries with an uncertain future, such as education and related roles like university athletics and the hospitality businesses that primarily serve education-based communities.
- Be vigilant and research the internet for closures or for firms doing things differently. Even smaller firms are often covered on local news websites. All accounts should be reviewed with a name and news search on the internet.
- Businesses that have experienced declines year-over-year (i.e. brick and mortar retailers) should be avoided or priced conservatively.
- Consider declining opportunities for commercial space microeconomies (i.e. cleaning, catering, office supplies, etc.) in areas that are observing a second wave of closures.
The disruption that has occurred across of all the industries and activities mentioned above impact tax revenues at every levels. The next areas that will experience pressure will be government funding and future needs to support a return to normalcy – which will also impact hiring and layoffs.
Lastly, as we look toward life post-pandemic, higher wage positions take longer to rebound than lower wage occupations.8 Higher income sectors (occupations $50K+) such as finance, architecture, tech and engineering have been hiring at a rate 27% below last year’s trend. 8 Training and developing seasoned talent in these sectors just takes more time. Lower wage positions that have seen a large number of job losses including industries, such as retail and restaurants, are able to add staff very quickly.
We anticipate the harder-hit sectors will lag the general economy in returning to pre-pandemic productivity. Therefore, we should remain vigilant in underwriting individuals and groups over the next six to twelve months. There will be pressure to return to previous sales volumes. We caution carriers to remain vigilant around underwriting impacted industries and to identify opportunities with those that are thriving. Ensure you are knowledgeable regarding the industries that exhibit the most potential for profitable growth, versus those struggling financially.
This is a time when underwriters can provide value by searching for the most up to date information and paying close attention to contract details of the plans being offered. This will assist in the process of selecting and writing business at what we hope are profitable levels. Areas of change, challenges and unknowns are all points of pressure for an underwriter analyzing risks in this environment. Most of the best underwriters bring a “gut” instinct to their analysis – which will be the most important part to surviving the current period profitably, leveraging all knowledge available when determining better than average, average, and worse than average risks for the future.
1LaMonica, P.R. (Sept 2020). Commercial real estate flounders as housing market booms.CNN Business. https://www.cnn.com/2020/09/22/investing/commercial-real-estate-recession/index.html 2Biron, B. (July 2020). Five new uses for empty malls decimated by the retail apocalypse and COVID-19, from health clinics to homeless shelters. BusinessInsider.com https://www.businessinsider.com/5-alternative-uses-for-vacant-mall-space-according-to-experts-2020-7 3Braff, D. (Dec 2020). COVID-19 and a slow economy have forced law firms of all sizes to cut costs. ABAJournal.com. https://www.abajournal.com/magazine/article/covid-19-and-a-slow-economy-have-forced-law-firms-of-all-sizes-to-cut-costs 4Wittenberg, D.S. (Oct 2020). The pandemic’s dramatic effect on the business of law. American Bar Association. https://www.americanbar.org/groups/litigation/publications/litigation-news/business-litigation/the-pandemics-dramatic-effect-the-business-law/ 5The Physicians Foundation. (Aug 2020). America’s Physicians COVID-19 Impact Edition, Part One.
https://www.merritthawkins.com/trends-and-insights/article/surveys/Survey-of-Americas-Physicians-COVID-19-Edition/ 6The Physicians Foundation. (Sept 2020). America’s Physicians COVID-19 Impact Edition, Part Two.
https://www.merritthawkins.com/trends-and-insights/article/surveys/Part-Two-of-the-2020-Survey-of-Americas-Physicians-COVID-19s-Impact-on-the-Wellbeing-of-Physicians/ 7Thomas, L. (Aug 2020). Struggling retailers rush to file for bankruptcy as fears of a second wave of coronavirus linger. CNBC.com https://www.cnbc.com/2020/08/21/coronavirus-struggling-retailers-rush-to-file-for-bankruptcy-as-fear-of-a-second-wave-lingers.html 8DePietro, A. (Oct 2020). COVID-19 outbreaks are wreaking havoc on college towns. Forbes.com https://www.forbes.com/sites/andrewdepietro/2020/10/26/covid-19-outbreaks-are-wreaking-economic-havoc-on-college-towns/?sh=5a379ac11a68