Although the severity and extent of the COVID-19 pandemic is unprecedented in modern times, there are safeguards built into the structure of the insurance industry that are designed to maintain stability during major loss events like this one.
There are two key elements that are designed to provide protection against large financial loss for insurance companies and provide some stability in premiums:
Insurance regulations require carriers to maintain a claim reserve account at specified levels (based on the company’s size and risk profile) that provides a safety net if claim expenses are larger than anticipated. These reserves are funded through a part of the premiums charged to policyholders.
Reinsurance is coverage purchased by an insurance company from a third-party insurer that is designed to insulate them from major claims events. If claims, either individually or collectively surpass designated levels, the reinsurance carrier would reimburse the insurance company for a part of the claim cost.
Another aspect of the current pandemic that will impact carriers is that the severity of the virus varies in different regions of the country. As a result, insurance carriers will be affected differently based on the specific demographics of their insured populations. Carriers with large numbers of insureds in some of the country’s hotspots will experience greater claim expenses than carriers insuring greater numbers of insureds in minimally impacted regions.
Insurance carriers are also employers and as such, have experienced some of the same pandemic-related business costs as any other business. Added cybersecurity costs, outlays for equipment and software to facilitate their employees alternative work arrangements, etc. will impact their financial bottom line during this event. Even the downturn in equity markets will affect the expected level of return on their investment portfolio.
There is also the potential that some recent virus-related development will positively impact insurance costs, such as the more widespread use of tele-health services. In addition to providing access to care with lower costs, on a long-term basis this development could allow healthcare providers to extend their reach to more remote or less affluent groups of people to expand access to care and improve overall population well-being.
Considering all of these pandemic influences, it is likely that future health insurance premiums will be affected, although the expected range of impact probably won’t be clear until later this year.