For the month of April 2021, life insurance companies have recorded 5-10 fold spike in claims due to the second wave of COVID-19 pandemic. There were 1.9 lakh COVID-related deaths in the month of April. This is 17% higher than lives lost to the pandemic in the entire FY21.
A report by Macquarie stated that life insurers, while making COVID reserves last year, assumed 50-100% higher COVID-related deaths for FY22. The analysis shows that reserves made by them can cover 1.5-2x the COVID-related deaths in FY21. 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 actual assumptions.
“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,” Suresh Ganapathy, Macquarie research analyst 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.”
The report says that the bigger worry 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. It added that reinsurance rates could go up, affecting the VNB margins.
Moreover, general insurance companies have also seen a surge in claims and as of May, non-life insurance companies have received 14.8 lakh claims amounting to around Rs 23,000 crore. Since the start of the current financial year only, general insurance companies have received claims amounting to around Rs 8,400 crore.
Experts say health insurance contributes 20% of the non-life insurance making it the second largest portfolio in the industry. Indian population covered under health insurance has been relatively insignificant, but things have been improving as a number of people have been opting for health insurance over time.