“Life insurers, while making Covid reserves last year, assumed 50–100% higher Covid-related deaths for FY22. Our analysis shows that reserves made by them can cover 1.5–2x the Covid-related deaths in FY21,” said a report by Macquarie.
The 5-10 times increase in the number of death claims is based on enquiries with life insurance companies and industry bodies by Macquarie. The report says that worry for investors is there could be a significant impact on embedded value for life insurance players. The embedded value is a measure used to determine the worth of a life company that factors in future liabilities based on actuarial assumptions.
Of the three listed life insurers – HDFC Life, ICICI Prudential Life Insurance and SBI Life, Macquarie Research has projected 2%, 3% and 4% impact, respectively, on embedded value should Covid-related claims for FY22 be four times of FY21.
The balance sheet impact of pandemic deaths is protected to a certain extent from the reinsurance that a life company purchases. While reinsurers have committed to cover the policies already sold, they are being careful in underwriting new covers. Some reinsurers have withdrawn from providing covers, while others have raised their rates.
“The bigger worry for us could be the possible impact on VNB (value of the new business) margins, as reinsurance companies bear the bulk of the pain since more than 70–80% of retail individual protection is usually reinsured. As a result, reinsurance rates could go up, affecting VNB margins,” the report said.
“While near term outlook could be challenging, we are structurally positive on life insurance players and believe a 20% VNB CAGR (compound annual growth rate) is sustainable over the longer term,” Macquarie research analyst Suresh Ganapathy said in the note.
The other impact of the pandemic is that life insurance companies out of concerns for employees’ health are going a bit slow on soliciting new business. At the same time, companies have been cautious in respect of prospective customers’ health.
Watch Life insurance companies see 5-10x surge in Covid claims in April