Life insurance and the coronavirus disease (COVID-19)
NATASHA FIODOROFF, SENIOR ASSOCIATE | KIM WAYGOOD, SPECIAL COUNSEL | HBA LEGAL
The World Health Organisation (WHO) website1 records that globally, as at 20 April 2020, there have been 2,245,872 confirmed cases of COVID-19, including 152,707 deaths, reported to WHO. The first case of COVID-19 was traced back to Hubei Province in China in mid-November 2019. Five months later, a total of 6,606 cases of COVID-19 have been reported in Australia, including 70 deaths.2
The life insurance industry is now in the unexpected situation of having to radically respond to enormous changes, at extremely short notice. Who would ever have thought that a virus could change the world almost overnight?
This article looks at how COVID-19 has impacted upon and will change the life insurance industry.
Should the life insurance industry have seen this coming?
COVID-19 has burst onto the scene suddenly to wreak havoc on a scale that nobody could have predicted.
Perhaps any prudent life insurer and reinsurer would have closely monitored the earlier outbreaks of Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS) and taken subsequent precautions based on their learnings from these events. Previously though, nothing seems to have developed from these viruses to greatly affect the life insurance industry, particularly in Australia.
How has COVID-19 changed the life insurance industry?
The biggest impact on COVID-19 on the life insurance industry has been the way in which it has forced life insurers and reinsurers to re-examine their underwriting practices. They must also finely balance this with maintaining reasonable and ethical practices, particularly in light of the recent Royal Commission3 inquiry into life insurance practices.
Underwriting during COVID-19
An example of how life insurers and reinsurers have had to re-examine their underwriting policies is this — a customer who, pre-pandemic, did not have any life insurance cover at all, may wish to apply for life insurance cover because of COVID-19.
Naturally, if that customer is a high-risk applicant, a life insurer may not want to insure them or otherwise apply exclusions. Many ethical issues come to mind.
The customer may be a frontline worker, essentially keeping the public safe. They are also prime candidates for exposure to the virus and as a result, high risk to a life insurer.
If the customer is to be offered cover, the life insurer could consider applying an exclusion for COVID-19 and any related illnesses and complications. The life insurer would need to consider how far the exclusion should go and whether they can even apply any exclusions.
In our view, any conditions that come from the underwriting process specifically due to COVID-19 should be for a limited period (such as 6 months) and to be followed up with an interim review.
There has been much controversy on the topic of exclusions and denial of claims in the media lately.
TAL have recently been in the spotlight because internal documents were obtained by the Australian Broadcasting Corporation4 (ABC), which revealed an exclusion clause in new policies. Put simply, new insurance applicants that had travelled overseas, or showed symptoms of COVID-19, would be individually assessed and offered modified terms of insurance.
The ABC5 reported TAL’s proposed exclusion caused a backlash from doctors and the Australian Medical Association (AMA).
TAL issued a commitment statement “COVID-19 Commitment to frontline healthcare workers”,6 developed with the Financial Services Council (FSC). The commitment states that normal underwriting processes will occur. Applicants that have tested positive for COVID-19 or are waiting for a test result will not be immediately eligible for cover. This all seems perfectly legitimate, sensible and normal business practice.
There are financial limits in the TAL commitment statement which may be fine for most customers. How- ever, interestingly, there is a $4000 per month limit in total of any combination of income protection, salary continuance or business expense cover; although any life insurer may provide additional cover in excess of the limits.
The FSC issued a media release7 on 14 April 2020 “ACCC Approved: Helping Frontline Healthcare Work- ers Access Life Insurance”. The Australian Competition and Consumer Commission (ACCC) approved the FSC initiative to help healthcare workers to take out new life insurance cover. Initially, this seemed to be limited to frontline healthcare workers. However, later in the media release, the FSC CEO, Sally Loane, was quoted as saying: “This means not only doctors, nurses and hospital staff but also those who may be potentially exposed to COVID-19 such as police, pharmacists, paramedics and age care workers”.8
Subject to relevant conditions, participating life insur- ers are making a commitment not to decline an applica- tion for cover, nor charge a higher premium or apply a COVID-19 pandemic risk exclusion to any benefits offered.
While the FSC media release specifically refers to frontline healthcare workers, there are many other essen- tial workers that come to mind. The list includes teachers, day care workers, supermarket staff, cleaners and hotel staff, amongst others.
It is unclear whether a cleaner working at a hospital can be subject to exclusions or conditions, or whether life insurers will simply underwrite them in the usual way (ie on the basis that they are not at any additional risk of being infected with COVID-19).
Another example is whether a teacher, from a school where there have been confirmed cases of COVID-19, applies for cover, would be underwritten in the usual way or subject to exclusions.
The FSC media release also makes comment about customers that had life cover in place before 11 March 2020 when the WHO declared COVID-19 to be a pandemic. The FSC members have confirmed there are no exclu- sions on paying out a death claim related to COVID-19 if the customer followed government travel advice. This is probably academic now, as from 7 April 2020, overseas travel is currently banned, with few excep- tions.9
COVID-19 related illnesses
The current medical evidence relating to COVID-19 suggests a person can suffer from heart damage, an acute liver injury, or secondary infection, amongst many other complications. A patient may have COVID-19 and then recover but that same person could suffer heart damage as a complication. If that customer, months later, has complications with their heart, has the medical chain of causation been broken? On the face of it, it would seem the answer is no. If there was an exclusion for related illnesses, the customer may not be covered. This is a very grey area for life insurers.
Built in exclusions
At this time, there do not seem to be any life insurers that have a pandemic built in exclusion. It is not beyond reason that such exclusions be built in moving forward. Life insurers face major challenges, not least of which is criticism from the general public.
Despite the initial hysteria and hype and with coordinated government responses, Australia has not seen anywhere near the number of fatalities that were initially predicted. At the time of writing this article, 70 people have passed away from COVID-19 in Australia. Whilst tragic, it is probably not on a scale that is likely to send the life insurance industry into a financial panic.
A bigger concern for life insurers may be the disability claims that will come from unemployment and psychological illness. Life insurers should brace for a spike in claims as when unemployment rises, disability and stress claims increase in step.
A challenge for life insurers when assessing claims for illness with subjective symptoms is often the conflicting medical evidence regarding the level of disability. This is particularly so with psychological illness, especially when the driving force behind the claim is unemployment. Diagnosis does not necessarily equal disability.
Life insurers tend to operate on thin margins and the biggest losses come from the income protection business. Profits tend to come from the total and permanent disablement (TPD), trauma and life insurance premiums.
The recent media release from APRA shows us some interesting statistics. The media release says:
The life insurance industry’s performance continues to decline. … The significant increase in expenses was primarily driven by reserve strengthening as insurers recognised losses from the enduring adverse claims experience. … This persistent decline is primarily caused by poor performance of risk business.10
For the December 2019 quarter alone, a loss of $702.2 million was recorded for individual disability income insurance.
Using New South Wales as an example, currently there have been 2957 confirmed COVID-19 cases.11 Some of these people will hold life insurance and income protection cover. How many of them will have a 7 day or 90 day waiting period? How many will make a claim?
The table below shows the confirmed COVID-19 cases in NSW by age and gender. A lot of those affected may have income protection insurance, particularly in the 30–69 age group.
|30-39||245||244||491 (sic 489)|
Note: Excludes cases notified without a date of birth and/or gender.
What are some of the risks for the industry?
While the curve appears to be flattening, the effect of lockdowns on the workforce is staggering. Unemployment is predicted to reach 10%. To put this in perspective — a year ago, it was 5.1%.13
This will undoubtedly lead to an increase in claims, ultimately contributing to increased premiums that will indeed make life insurance less accessible to many incomes.
Many of the increased claims will be for mental health. For example, a waitress loses her job due to COVID-19 lockdown and subsequently develops major depressive disorder, which leads to a certification that says she has no work capacity. Is the waitress unable to work because she lost her job due to the lockdown? Or is she unable to work due to her diagnosed psychiatric condition?
What do life insurers do when assessing a claim made by someone that is immune deficient or has other co-morbidities and are afraid that they will catch COVID-19? For example, an emergency nurse with severe asthma — is that nurse allowed to stop work and go on claim in case they get sick? Such a situation should be reviewed on a case by case basis.
What do life insurers do with high earning executives or business owners that have extra pressures as a result of COVID-19? The risk of stress claims is amplified.
As at 1 April 2020, APRA have required life insurers to stop selling agreed value income protection policies. Customers can only apply for indemnity cover — ie 75% maximum of what the customer is earning, when they go on claim. This may have an effect on the life insurance business, albeit minor.
What are the solutions?
There is nothing the life insurers and reinsurers can do to prevent the inevitability of claims in the current environment.
Life insurers and reinsurers may need to be more proactive with customers on claims and encourage them to use a range of services that will enable them to return to the workforce. Whether this is mental health services, passive therapies or even retraining programs; any service that expedites a return to the workforce is beneficial.
Life insurers need to reword policies to stipulate that the customer must undergo specialist care and adhere to a treatment plan that encourages a return to the work- force. Currently, a customer can receive advice and referrals from their general practitioner but choose not to follow this course of action. They can remain on claim whilst having no treatment whatsoever. In the current climate, this is hardly in the best interests of the customer or the life insurers.
Of course, if customers become fit to return to employment, the next issue is what if there is no job to which to return. Unfortunately, there is no solution on the near horizon to the sudden large erosion of the workforce. We can only hope that government policy stimulates the economy and creates employment and, in some cases, reinstatement.
The next 12–18 months is going to be an interesting time for life insurers and reinsurers. They are going to face many challenges and of course, many unprecedented scenarios. Thoughtful preparation and rewording of insurance policies will help meet these challenges head on, rather than retrospectively. If this is done properly and sensibly, fair and just outcomes will help everyone move forward in these dark days.
This article was published in the May 2020 edition of Australian Insurance Law Bulletin.
For access to in-depth commentary and analysis on legal issues arising from COVID-19, please request a complimentary trial of Lexis Advance.
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- Word Health Organization, WHO Coronavirus Disease (COVID-19) Dashboard, https://covid19.who.int/
- Department of Health, Coronavirus (COVID-19) at a glance, 5 April 2020, www.health.gov.au/resources/publications/ coronavirus-covid-19-at-a-glance.
- Royal Commission into Misconduct in the Banking, Superan- nuation and Financial Services Industry, Final Report (2019) https://financialservices. royalcommission.gov.au/Pages/default. aspx.
- P McGrath, “Insurance giant TAL moves to exclude people who die from COVID-19, leaked policy reveals”, ABC 6 April 2020, www.abc.net.au/news/2020-03-27/insurer-tal-moves-to-exclude- people-who-die-from-covid-19/12093542.
- P McGrath, “TAL drops plans for coronavirus exclusion clause on life insurance”, ABC 8 April 2020, www.abc.net.au/news/ 2020-04-08/tal-backflips-coronavirus-exclusion-clauses-for-life- insurance/12130484.
- TAL, COVID-19 Commitment to frontline healthcare workers, www.tal.com.au/covid19-commitment.
- Financial Services Council, Media Releases, available at www. fsc.org.au/news/media-releases.
- Financial Services Council, “ACCC Approved: Helping Front- line Healthcare Workers Access Life Insurance” media release (14 April 2020), www.fsc.org.au/news/media-releases.
- Australian Government, Department of Foreign Affairs and Trade, Travel Advise in challenging times, www.smartraveller. gov.au.
- APRA, “APRA releases life insurance statistics for Decem- ber 2019” media release (27 February 2020), www.apra.gov. au/news-and-publications/apra-releases-life-insurance-statistics- for-december-2019.
- NSW Government, Health, COVID-19 (Coronavirus) Statis- tics, (as at 18 April 2019) www.health.nsw.gov.au/news/Pages/ 20200419_00.aspx.
- Australian Bureau of Statistics, “Trend unemployment rate steady at 5.1%” media release (16 May 2019), www.abs.gov. au/ausstats/abs@.nsf/lookup/6202.0Media%20Release1Apr% 202019.