Hannover Re surprised investors when it posted €320mn of Covid losses in the third quarter primarily from Taiwan “deemed hospitalisation” coverage.
The reinsurer explained that the losses emerged from an accumulation of small payments to insureds who tested positive for Covid.
To reduce pressure on the island’s medical resources, Hannover Re said regulators changed the rules that allowed home quarantine to trigger for medical insurance payments.
Executive Board member Sven Althoff explained: “The main driver for the development in the third quarter is really the regulatory change”.
“It's not the weakness of the policy wording as such. It's the fact that the regulator just overruled the terms and conditions of the policy,” he continued.
The Taiwan regulator is understood to have since tightened the rules but not before local insurers have been reportedly hit by an estimated $1bn+ of medical insurance claims from the popular policies.
Thailand also saw a flurry of insolvencies last year from life insurers facing waves of claims on these low cost medical/Covid claims, including Southeast Asia Insurance and most recently, Syn Mun Kong.
But fears are emerging that these losses will be dwarfed from H2 2022 claims emerging out of Japan which experienced a fresh spike of infections last year, described locally as the sixth and seventh waves.
Japan’s life insurers were also encouraged by authorities to regard Covid infections as triggering “deemed hospitalisations”.
Typically, Japan medical insurance policies clauses stipulate that hospitalisation benefits are only provided “when medical treatment under the supervision of a doctor at a hospital is required.” In principle, the patient must be hospitalised to receive the benefits.
But as the scale of the coronavirus pandemic emerged in 2020, Japanese insurers were encouraged to adopt a more flexible interpretation of medical insurance policy clauses and under “special measures” pay benefits to infected policyholders even though they quarantined at home.
New Covid spikes
However, the total amount of benefits paid skyrocketed last year as the country experienced fresh spikes in the virus. According to the Life Insurance Association of Japan, its member companies paid out ¥58bn ($450mn) in 2021 with the total then jumping to ¥270bn ($2.1bn) by July 2022.
Most of the claims were paid by Japan’s eight heavyweight life insurers, which include Nippon Life, Japan Post Insurance, Sumitomo Life, and Dai-ichi Life.
Claims continued to spike throughout the late summer - with an estimated 90 percent of claims paid to claimants who were not hospitalised. Amidst fears of fraudulent claims and pressure on some insurers’ solvency ratios, in September 2022 the regulator finally agreed these Covid special measures terms should be tightened.
As a consequence, from 26 September policyholders over 65, pregnant women or those hospitalised were entitled to claim under standard medical insurance policies. According to the industry, the move was expected to reduce claims by as much as 70 percent.
The question is to what extent International (re)insurers may be impacted by these losses - typically by writing QS covers supporting Japanese and other Asia life and general insurers (and mutuals).
Hannover Re, for example, explained during the Q3 call that around €400mn of its €3bn APAC premiums came from “personal lines partnerships we have developed with ceding companies”.
In response, Hannover Re said it had “cancelled” its affected Taiwan treaties but could not guarantee there would be no negative movement in Q4.
“Those contracts are in runoff for quite some time now and the still active policies have significantly reduced, which means that we cannot say that there will be no further development in the fourth quarter. But we feel that we have now reserved for the bulk of what we have to expect,” Althoff explained.
The net impact was also reduced as the German reinsurer was able to part-offset the losses by releasing “roughly €170mn” Covid IBNR reserves relating to its credit and surety lines in the second and third quarters of last year (while retaining a further €200mn Covid IBNR).
Yet analysts were clearly taken back by the re-emergence of Covid losses after assuming the pandemic’s impact was ring-fenced to the 2020-21 underwriting years and many of the questions directed at management focussed on the issue. The veteran industry watcher Andrew Ritchie, director at Bernstein Autonomous LLP, encapsulated this surprise when he exclaimed on the 3 November Hannover Re call: “I just want some reassurance.”
The imminent fourth quarter and Lloyd’s reporting season will likely highlight to what extent this is a problem for international markets (and investors) beyond Hannover Re’s disclosures.
Take Zurich, for example. The Swiss-headquartered insurer has made a strategic play of growing its Asian life market share notably in recent years, in part through acquisitions such as the 2019 acquisition of ANZ’s life insurance business, OnePath Life.
Might it also be impacted by the surge in “deemed hospitalisation” claims, for example?
The global insurer declines to comment beyond saying: “As of HY-22, Covid-19 claims did not have a material impact on our results. Zurich will report on its Full Year 2022 figures on February 9, 2023.”
It will also be interesting to see whether Hannover Re’s European peers - Munich Re, Swiss Re and Scor - are affected as well as specialist regional reinsurers such as, say, Toa Re.
Beyond the heavyweight Europeans, there is also uncertainty whether the issue could seep into the specialty A&H and PA cat markets, typically written in markets such as London.
London market A&H underwriters approached by this publication were reluctant to comment publicly but said they are aware of the issue. One Lloyd’s underwriter expressed relief: “thankfully we are not involved in any of the treaties out of Japan and Taiwan” but acknowledged rivals may not be so fortunate.
PA cat covers could be engaged if affected insurers bought cover to protect their gross A&H/medical exposures. In theory, hours clauses are designed to limit losses to major cat events but it is possible there could be claims if respiratory disease exclusions were not applied and there were no hours clauses.
One flicker of good news is that China may not be a trouble zone like Taiwan and Thailand despite also experiencing a rapid surge in infections last year which the authorities have struggled to contain. This, at least, is the view of AM Best, which commented: “In comparison to the Covid-19 products offered in Taiwan, the Covid-19 related covers offered in China have typically stringent policy clauses.”
“As such, the frequency of Covid-19 claims can be expectedly lower than the population infection ratio,” AM Best added.
However, it was potentially revealing that a number of Chinese insurers including Waterdrop - the largest third-party insurance platform - scrambled to withdraw Covid-related coverage from their equivalent low-cost policies in Q4 2022 in response to the difficulties experienced by Taiwan and Thai insurers.
The fourth quarter reporting season begins in earnest next week with the early US reporters before Europe follows in February and March. Analysts will naturally be focusing on the large sector and macro themes such as inflation, the cost and availability of reinsurance and Ukraine-Russia loss exposures. But keep an eye on the issue of “deemed hospitalisation” losses emerging from Asia.
And if they do emerge, will all (re)insurers be able to soften the pain by releasing redundant Covid IBNR reserves like Hannover Re?
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