Best’s Special Report: U.S. Individual Life Payout Ratios Down Despite COVID-19 Mortality Concerns

Higher premiums and fewer death benefits have led to reduced payout ratios on individual life insurance policies since 2020, despite concerns about COVID-19 and elevated mortality in certain population segments. according to a new AM Best report.

In its Best’s Special Report, titled, “U.S. Individual Life Payout Ratios Down,” AM Best notes that the impact of COVID-19 on life insurers’ individual policy claims has been less pronounced than some may have initially expected, although the pandemic has resulted in elevated mortality among certain demographics.

“Insured lives’ mortality levels have run lower than the general population, owing to the effect of selective underwriting and sales methods insurers have adopted over many years,” said Stratos Laskarides, senior financial analyst, AM Best. “Mortality rates have risen but have thus far been a manageable drag on earnings in aggregate for the individual life insurance line.”

This was evident from a drop in the payout ratio, which compares paid death benefits to net premiums written, and fell to 48.9% in 2022, from 53.7% in 2021 and 55.7% in 2020. According to the report, this was due largely to declines in death benefits. Questions remain about the near- and long-term impacts of pandemic-related mortality experience on assumptions and future pricing for the life insurance industry. Early evidence indicates different approaches to insurers’ mortality assumptions, as some companies have updated pricing assumptions for the pandemic experience while others have not.

Following a record high level in 2021, first-year premium growth dropped significantly in 2022, partly attributable to the impact of inflation on household budgets. Renewal premium growth on individual policies also declined moderately and had been consistently positive over several years. “In 2021, this level increased to its highest point in a decade, as many policyholders valued retaining coverage during a pandemic,” said Helen Andersen, industry research analyst, AM Best.

Renewal premiums continue to dominate the individual life premiums U.S. life insurers receive, which highlights the long-term nature of the business and the importance of maintaining financial strength and maximizing policy owner satisfaction and retention. The affordability of life insurance may be an issue in light of rising expenses due to inflation and other economic factors.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=339430.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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