By Jeff Sistrunk

Law360 (June 23, 2020, 10:48 AM EDT) -- American Council of Life Insurers CEO Susan K. Neely and Senior Vice President Paul S. Graham recently spoke with Law360 about how the COVID-19 pandemic has created underwriting challenges for life insurance carriers and exacerbated the persistent low interest rate environment that has vexed the industry for years. 

This interview has been edited for length and clarity. 

How has the pandemic affected life insurance underwriting?

Neely: There is no doubt COVID-19 has raised some of the greatest underwriting challenges for life insurers since World War II.

We look at CDC data that makes clear that older Americans have been hardest hit by the pandemic, which has created unprecedented disruption in mortality data, created uncertainties and made it difficult for life insurers to set premiums in the near term for this important group. And when considering new applications, insurers have to take into account obligations to existing policyholders.

While the pandemic has created challenges, companies and their agents will continue to want to help people get the coverage they need. The pandemic will not stop carriers from wanting to offer coverage in the future, even more than the nearly $20 trillion in financial protection they are offering today to over 90 million families. We are a central part of the social safety net of this country, and will have an important role to play in the recovery phase of the pandemic.

How do current conditions compare to those after World War II?

Graham: The primary thing that happened in the aftermath of World War II was that the economy actually took off. There was a lot of demand coming out of the war, and employment was high. Interest rates were relatively on the upswing.

This made it a good time for life insurers, with a lot of demand for their products. It is different with this pandemic. We do not see the same dynamic. There is no indication yet that we will see a resurgence in the economy in the near future, or that interest rates will go up. Similar to World War II, there is a lot of debt in the country that must be repaid in some fashion. That will be a drag in the next decade.

While the underwriting issues that Susan referenced are as complex to those during World War II — when the industry had to figure out what to do about young folks going off to war — with the pandemic, the impact is more on elderly rather than young people. The continuing challenge after COVID-19 is going to be greater than what it was coming out of World War II.

How has the low interest rate environment impacted the industry? 

Neely: A substantial amount of fixed-income investments that life insurers make are first through risk-free rates or the U.S. Treasury, which are at historical lows. There is no estimate as to when these rates will go back to historical norms. That is one challenge for us.

At the same time, credit spreads have widened due to deteriorating economic conditions. That means increasing risk that borrowers will not be able to repay their obligations. As a result, life insurers are faced with making long-term investments at low rates, and/or taking increased risk of credit losses on investments they make to support policyholder liability.

Paying those long-term guarantees is at the core of our value proposition as an industry, and that model will be much more difficult to do as a result of the sustained environment of low interest rates and the impact of the pandemic. Low interest rates may have an impact on the affordability of life insurance products and possibly the availability of some products, which is not good given the importance of these products to financial stability.

How have some insurers responded in the short term?

Graham: The vast majority of companies have stopped taking on older-aged individuals for the short term, primarily because you would have to charge them an awful lot for a short-term risk.

You don't really want to charge someone way more than the long-term risk would bear out. So the normal reaction has been to stop underwriting temporarily for folks who are elderly until more is known about the pandemic and how it is going to impact mortality.

How has ACLI adapted to working during the pandemic?

Susan: We have been highly productive in this remote working situation. We have a really great team of dedicated professionals devoted to helping life insurance companies stay in operation during the pandemic. Life insurers had to be declared essential services by governors who were shutting down state economies, which they were, thanks to the efforts of our team.

Technology has been very empowering. We had made an investment in technology last year, making sure everyone had docking stations that were mobile so they could work from home. That proved to be a great investment. We held a work-from-home training on March 13, to make sure everyone was comfortable, and the situation then deteriorated over that weekend. We have now been successfully working from home for over three months.

--Editing by Rebecca Flanagan.

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