While much of insurers’ focus since the start of the COVID-19 pandemic has been directed to mortality and excess deaths, the crisis has also materially affected morbidity experience.
This brief considers the driving factors of changes in healthcare claims costs and the challenges these changes pose in determining appropriate and fair future premium rates.
Changes in claims costs: increases and decreases
Claims costs have been impacted by forces acting in both directions during the pandemic. The short-term negative impact is primarily driven by hospitalizations for the treatment of SARS-CoV-2-infected patients. This impact may be mitigated in some countries where the state is funding COVID-19 admissions, but only to the extent policies do not provide benefits in lieu of hospitalization. From a claims cost perspective, this has been partially offset by reduced healthcare demand during lockdowns, when health systems cancelled or deferred non-emergency care to increase capacity and public fear changed health-seeking behaviour. While this impact is expected to be material, it also could be largely “zero-sum” in the medium term, with only a limited amount of care canceled outright and the remainder merely deferred to later periods. There are also concerns that this deferral of care could increase case severity owing to later diagnosis and delayed treatment.
Additional factors that could impact claims costs, either temporarily or more permanently, include:
- General impairment of health for those with past severe SARS-CoV-2 infection, increasing claims
- Improved air quality during lockdowns, reducing respiratory claims
- Improved hand hygiene and social distancing, reducing infectious disease claims, such as flu
- For policies with international cover, travel restrictions resulting in admission locally rather than abroad, reducing case severity
- Psychological impacts of the pandemic, increasing claims related to mental health conditions
- Vaccinations and testing, increasing outpatient claims
- Costs of additional personal protective equipment (PPE), increasing overall costs
The number of factors influencing claims, with some increasing and some decreasing claims costs, combined with the uncertainty of any second wave, results in significant challenges in estimating experience in the short to medium term.
Premium rating: uncertainty ahead
Looking ahead to setting premium rates for the next underwriting year, the pandemic has introduced significant uncertainty. Firstly, the magnitude and timing of the future impact of the factors described above are largely unknown, including when an effective vaccine might be available and widely distributed. Secondly, the effect of these factors on recent past experience, as well as changes to claims development patterns, will make recent past claims an unreliable baseline for estimating future experience – 2020 claims experience may need to be discarded for pricing purposes, with reliance on prior years’ data.
In addition, insurers and reinsurers will need to consider how to fairly approach any abnormal profits expected in 2020 owing to deferred care and the possible higher-than-normal claims in 2021 owing to deferred care returning. The timing of the peaks and troughs in experience will be an important consideration in approaching this problem.
Beyond the pandemic
The health burden of COVID-19 has fallen heavily on lives with chronic conditions, highlighting the need to focus efforts on better management and prevention of these conditions. Ways to lessen the impact of this and future pandemics should be important strategic considerations for health insurers, with prevention of chronic illness through health and wellness initiatives an increasingly high priority.