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The Income Protection (IP) market should brace itself for more COVID-19-related claims, as the second wave of the pandemic continues to unfold and the government’s job retention schemes gradually unwind.
An indication of the profound uncertainty that the pandemic is causing can be seen in how small changes in the infection rate over time (the Rt rate) have a huge impact on a portfolio’s infection attack rates (IAR). We forecasted that if the Rt rate had stayed below 1, then the IAR would be no more than 1.4% after a year. But, if Rt reaches 1.3, then the IAR could hit over 25% after a year. With the current Rt in the UK standing between 1.1 and 1.3 at the end of October, this is not an impossible scenario.
Our modelling shows very few IP claims from those who recovered at home, and only a small number of claims from those who were hospitalised where their policy’s deferred period is more than two weeks. But the IP market shouldn’t think it’s out of the woods just yet.
Indications are emerging that COVID-19 can have profound long-term consequences on some people’s health. A recent King’s College London study suggests as many as 1 in 20 people may suffer symptoms for eight weeks or more, the so-called “long COVID”. The after-effects from the virus can be wide ranging, from respiratory problems to loss of concentration and depression.1
The initial lockdown will also have large knock-on effects on other aspects of the population’s health. Cancer Research UK estimates that by June 1, 2.4 million people were waiting for cancer screening, tests or treatment, meaning that as many as 23,000 cancers might have gone undetected.2
Undiagnosed cancers aren’t the only worry. In late March, the number of people attending A&E with suspected heart attacks halved. A British Heart Foundation (BHF) survey of the country’s cardiologists found that 84% reported fewer patients were being admitted with the most serious types of heart attack. The BHF warns there will be lasting consequences to not treating heart attacks or diagnosing new heart conditions early enough.3
The government’s intention is to continue treating non-COVID illnesses during lockdown this time around, but this relies on hospitals not becoming overwhelmed with COVID patients.
The biggest question is how the pandemic-induced economic downturn will affect IP, but it’s also the most difficult to answer. This recession is unique, so we can’t look back at past economic slumps to try to learn lessons about what may happen in this one.
A useful measure of the depth of a recession can usually be gauged by the unemployment figures, but official data showed the jobless rate earlier in 2020 in both the UK and Ireland running at around 4% - the lowest level since 1973 in the UK. However, the two governments’ furlough schemes figures were likely to be masking a much higher number of jobless people. In the UK, 9.4 million workers have been furloughed, while a further 2.6 million self-employed people are claiming assistance grants. In both countries, unemployment rates are now rising. The latest figures for the UK show a figure of 4.5% by July 2020 and for Ireland figures had already risen to 7.3% by October 2020. This rate would skyrocket to over 20% if all claimants of the Pandemic Unemployment Payment were classified as having lost their jobs.
In July the UK’s Office for Budget Responsibility (OBR) put out a range of unemployment forecasts for the next five years. Its “upside scenario” sees the jobless rate peaking at 10% this year before falling to around 4% by early 2025, whereas its “downside scenario” expects unemployment to rise to 13% in early 2021 before gradually flattening out to 6% in five years’ time.
Both scenarios would have a big impact on IP claims. Using the OBR estimates, and assuming a typical rule of thumb that new claims rise by 3% for every 1% increase in unemployment, we forecast that new IP claim inceptions could increase by 12% to 27% in the first quarter of 2021, by up to 17% in Q1 2022, and then by as much as 10% at the start of 2023.
With IP claims set to rise over the next few years, the challenge of pricing in such an uncertain economic climate will be enormous. The Gen Re team is here to support you through what promises to be a turbulent future. Don’t hesitate to get in touch.
