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SPLASHPacific Life Re Quarterly Newsletter

Volume 10 | May 2020

A U S T R A L I A

From the General Manager's desk

Welcome to the May edition of Splash. On behalf of myself and the wider teams at Pacific Life Re and UnderwriteMe, I would like to take this opportunity to thank our clients for your collaboration, flexibility and resilience in moving forward with

business amidst these unprecedented times. I am proud that our staff have managed to transition quite seamlessly to their new working-from-home environment and we hope that others have been as fortunate. Our number one priority has and always will be the safety of our employees, and the employees of our valued clients and business partners. In light of COVID-19, we thought it would be helpful to share some considerations relating to its impacts on Income Protection business in Australia. You can also catch up on our latest company news and see what we have been doing to sustain team morale from afar. Enjoy reading Splash, stay positive and take care!

Tyson Johnston | General Manager, Australia

Latest local newsJennifer Lang joins the Pacific Life Re Australia BoardJennfier Lang has been appointed to the role of Independent Non-Executive Director on the Pacific Life Re Australia Board. Jennifer replaces Mark Gallagher, who has resigned from his role on the Board after five years of service. Follow this link for the full media release.

Global news and research• Phil Hay has been appointed as the new Head of Pacific Life Re Korea. He will be based in Seoul, reporting to Andrew

Gill, Managing Director Asia & Australia. Follow this link for the full media release.• Senior Underwriting Developer for Europe, Mike Wilson, put together a short Coronavirus Mythbuster, to help those

of us inundated with information relating to the virus, including death rates, possible new treatments, or changes to public policy across the globe.

Our team during COVID-19We held a Virtual Fitness Challenge, where staff tracked and shared their workouts. For every kilometre travelled, the business donated funds to the St Vincent de Paul Society, to help local communities affected by COVID-19. We usually love working out together, so this was a fun way to stay sane and connected in this working-from-home environment. Our team walked, ran, cycled and swam various distances and routes across the greater Sydney region, raising almost $3,000 for a good cause!

Our clients during COVID-19The COVID-19 pandemic has demonstrated just how quickly risks can evolve and it continues to be a serious and dynamic risk management challenge, needing real time insights and swift, frequent reactions. We are proud that our Underwriting Rules Engine (URE) clients have, within minutes, updated and deployed changes to their risk management philosophy via the URE to meet these challenges. Unprecedented times highlight the value of agile and integrated technology and it’s reassuring knowing our clients have the capability to respond quickly.

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SPLASH

COVID-19 and Income Protection (IP) considerationsHelena Hayes | Director, Research & Development

Contact usIf you would like to talk about how we can support your business, or for any media enquiries, please contact Pacific Life Re Australia's

Head of Client Solutions, Martyn Gilling, at martyn.gilling@pacificlifere.com.

A U S T R A L I A

Volume 10 | May 2020Pacific Life Re Quarterly Newsletter

In our last Splash newsletter, we discussed the APRA IDII response to the challenges faced by the IP market. Those challenges still exist, however we now have a new and challenging layer of complexity; COVID-19 and its potential impacts. The Actuaries Institute COVID-19 Working Group published a framework exploring a complete range of considerations, for example the short term impact on claims assessment and management. While these impacts should certainly not be overlooked, the longer-term impact is unquestionably more important but also multifaceted and difficult to predict. Pacific Life Re is working on modelling potential impacts and determining possible assumption sets. Below is a high-level view of some of the longer-term considerations we're looking at. Please get in touch with our team if you would like to discuss any of these in further detail.

Positive correlation between unemployment and incidence rate Treasury has estimated unemployment will almost double to 10% over the next 3 months. It’s widely acknowledged that increased unemployment generally leads to an increase in IP incidence, however it can be difficult to determine the level of that increase. In the past, a 1% increase in the unemployment rate has led to anything between a 3% and 10% increase in IP incidence. Recent research suggests there is a notable difference between the impact observed by gender, with females being impacted to a greater extent. This analysis also revealed claims due to accident increased which is contrary to conventional wisdom. No material impact was observed for mental health claims, however the mental health landscape has changed significantly since this data was gathered and the choice of assumptions will require considerable judgement.

Long tail claims Higher incidence rates are of obvious concern, particularly if those claims are likely to last a significant amount of time. Motivational factors play an important role during times of economic instability. If work doesn’t exist or earning capacity is greatly reduced, claimant behaviour will change in an attempt to ensure financial security. Insurers will need to consider this, while also ensuring community expectations are met and policyholders are treated fairly. Looking at previous recessions, we know that the unemployment rate can increase quickly but take a significant amount of time to return to pre-recession level.

When analysing the breakdown of unemployment by duration in Australia we also see it can take a significant amount of time for the long-term unemployment rate to level off post a recessionary period (Data source).

Insured lives versus population Finally, we need to consider how these macro impacts will specifically hit the insured population. We consider age and socioeconomic profile in our analysis but above all the impact on specific occupations and industries. This downturn will be felt by all, but we may see industries with a higher proportion of insured lives bouncing back faster than the hospitality and retail industries, for example. The Group and Retail sectors are also likely to be impacted in very different ways.

It’s a very specific issue we face here in Australia and every country's experience has been different. Our colleagues in the UK and US, for example, are busy modelling anticipated death and trauma impacts. Luckily, as we have experienced lower infection rates and so expect fewer deaths, we don’t have the same concerns. However, our exposure to IP risk is somewhat unique and thus so are the considerations. We are working with our clients to further understand the impact of COVID-19 using local and global data, to provide them with the most appropriate and tailored support possible.