Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
This article was initially published on September 23, 2020, using data through July of this year. The data and reports are being refreshed on an ongoing basis as data becomes available. Commentary on new trends has been added below.
The COVID-19 pandemic has had a profound effect on the economy and daily life around the world. In the United States, the impact of the pandemic has been widespread; however, certain states and local regions have experienced an impact that is more severe relative to others. With persisting high unemployment rates and the not too distant memory of the 2008 global financial crisis, there is concern on how the pandemic is impacting the housing market. The dynamic dashboard in this article allows users to assess the impact the pandemic has had on the housing market at the state level across various metrics.
The metrics below display information on housing inventory, numbers of days on the market, house price trends, unemployment rates, mortgage delinquency rates, and the number of COVID-19 cases. Generally, as discussed in a related article,1 the housing market has been a bright spot in the economy throughout the pandemic. However, the large and sudden increase in mortgage delinquencies is concerning. Given the strong housing market, it is anticipated the ultimate foreclosure rate will be significantly lower relative to the global financial crisis. The dashboard in Figure 1 allows readers to view trends by state and evaluate the impact the pandemic has had on regional housing markets.
A quick view of the dashboard for any state shows a generally consistent theme: the pandemic has had a significant impact on unemployment rates and mortgage delinquencies. However, housing market statistics have performed surprisingly well and have shown the consistent strength of the housing market throughout this period of uncertainty. Figure 2 provides a summary of the number of COVID-19 cases per 100,000 population, the unemployment rate, and the mortgage delinquency rate from March 2020 through July 2020 for three states.
|Number of COVID Cases per 100,000*||Unemployment Rate||Mortgage Delinquency Rate (%)**|
|Florida||Nevada||New York||Florida||Nevada||New York||Florida||Nevada||New York|
* Shown as cases per 100,000; the dashboard provides cumulative total cases.
** Delinquency rate on loans underlying credit risk transfer securities issued by Freddie Mac.
The following commentary analyzes the above three states to assess the relationship between COVID-19 and local housing markets. The three selected states are New York, Nevada, and Florida. The pandemic has greatly impacted these markets either in terms of high numbers of confirmed cases or impacts on the economy; these states were selected because they have the highest delinquency rates in the nation.
We have observed some interesting trends in October with respect to mortgage delinquency rates, the number of COVID-19 cases, and unemployment rates. The October data also coincides with the first exposure of post-forbearance performance. In March, many loans were given a six-month forbearance period from the CARES Act with the option to extend the forbearance period for up to 12 months. As the initial forbearance period came to an end, loans that were in forbearance had to enter repayment plans, deferral, modification, or reinstatement to begin to resume payments on their mortgages.
For most states, there was a slight increase in mortgage delinquencies between September and October. There are a number of potential reasons for the slight increase in delinquencies. October data highlights a potential correlation with mortgage delinquency rates and the number of COVID-19 cases. Both the delinquency rate and number of COVID-19 cases increased for the month; however, the unemployment rate decreased for most states. To-date, there has been a stronger correlation with unemployment rates and delinquencies compared to COVID-19 cases and delinquencies. This month represents a potential break from that trend.
A separate potential driver of the increase in delinquencies could be the transition from forbearance to mortgage repayment, in which borrowers either forgot or were unaware of the requirement to resume mortgage payments. The next few months of data will highlight which trend drove the increase in mortgage delinquency rates.
Looking at one state, in Wisconsin (a state with a recent large increase in COVID-19 cases), the number of COVID-19 cases increased from 30,000 in July 2020 to 240,000 in November 2020. However, the unemployment rate declined from 7.00% in July 2020 to 5.40% in September 2020 (the most recent month available). From July 2020 through September 2020, the delinquency rate on mortgage loans decreased from 2.97% to 1.98%, consistent with declines in the unemployment rate. However, in October 2020, with a near doubling of COVID-19 cases, the delinquency rate also increased from 1.98% to 2.58%. It is too early to tell if this is a result of COVID-19 or if this observation is a function of the end of forbearance programs.
Notwithstanding the slight increase in new delinquencies for the most recent month, housing market trends continue to point to a strong mortgage market despite the pandemic. Median listing prices continue to increase and the median days on market, on average, are still much lower than pre-pandemic levels, with inventory slightly declining month-to-month.
The data trends observed in September and October continue to support the initial conclusion that the ultimate impact of the pandemic on the mortgage market will be limited and will not result in credit losses like those observed from 2007 through 2012.
In August, the unemployment rate continued to decline for almost all states (there was slight increase in the unemployment rate for Kentucky and Rhode Island). New York saw a significant decline in the unemployment rate from 15.9% to 12.5%. Despite the decrease, unemployment in New York remains at historically high levels. In Florida, the unemployment rate decreased from 11.3% to 7.4%, which, while lower, remains elevated compared to the state’s long-term average unemployment rate.
Consistent with lower levels of unemployment rates, the percent of loans that are 30-days delinquent (i.e., new delinquencies) has similarly declined across most states. For New York, the percent of loans 30-days delinquent declined from 1.80% to 1.32%. Note that a 30-day delinquency rate of 1.32% is getting close to pre-pandemic levels. For reference, the 30-day delinquency rate in February 2020 was 0.83%. However, the population of loans that are seriously delinquent (i.e. 90 days delinquent or worse) increased from 6.12% to 7.14% as many borrowers remain on CARES Act forbearance policies. In February 2020, the seriously delinquent rate was 0.25%.
Between July and August, cases of COVID-19 began to increase in certain states. For example, in Wisconsin the number of COVID-19 cases grew from 80,000 to 130,000. So far, this increase in cases is not correlated with higher unemployment rates or mortgage delinquencies. The unemployment rate in Wisconsin decreased from 7.0% to 6.2%, and mortgage delinquencies also continued their monthly decline.
The data trends observed in August continue to support the initial conclusion that the ultimate impact of the pandemic on the mortgage market appears to be temporary and will not result in significant credit losses. A recent report from Blank Knight states, “Of the 6.1 million homeowners who have been in COVID-19-related forbearance plans, 41% (2.4M) have since exited, with the vast majority of those borrowers currently performing.” Many of these exits occurred as initial 3-month and 6-month forbearance periods ended, with borrowers making payments again. As borrowers reach the end of the forbearance periods, we anticipate many homeowners will continue mortgage payments and transition from delinquent to current.
This dashboard will be updated monthly as we continue to monitor and navigate the pandemic.
New York was one of the first states in the United States to experience significant disruption and widespread cases of COVID-19. Cumulative cases in New York are approaching 400,000 (or 2.3% of the total New York population), with 300,000 cases being reported before May 2020. This resulted in unemployment rates in New York jumping from 4.5% in March to approximately 14.5% in April. While other states experienced similar spikes in unemployment rates during the month of April (when quarantine mandates were at a peak across all states), the unemployment rate has generally declined from April through July as businesses began to reopen. For New York, however, the unemployment rate has slightly increased over this time period.
As of 2019, nearly one-third of New York’s economy was classified as financial activities, with many employees commuting to New York city from out of state.7 Supporting this sector, the next two largest areas of the economy are professional and business services (13.8%) and transportation (13.3%). As many businesses transitioned to remote work, the demand for professional and business services and transportation has declined. This has a negative impact on the unemployment rate.
The sticky unemployment rates as a direct result of COVID-19 and subsequent mandates in New York have contributed to a high and persistent mortgage delinquency rate. Using data from Freddie Mac on mortgages that collateralize credit risk transfer transactions, the total delinquency rate for loans in New York was less than 2.0% prior to COVID-19. With the pandemic, the delinquency rate increased to over 11.0% and has remained at 11.0% through the pandemic to date.
However, offsetting this trend, median home prices have been increasing, with a steady inventory of homes for sale, and numbers of days on the market that are consistent with those before COVID-19. As discussed in a related article,8 the housing market has been a bright spot in the economy during the pandemic through July 2020. While there are a significant number of delinquencies, many of these delinquencies are in temporary forbearance, and we expect the transition rate from delinquency to foreclosure to be relatively low compared to the global financial crisis.
Nevada is a service-driven economy, with nearly 14% of gross state product attributable to accommodation and food services (this compares to less than 3% for the United States).9 Therefore, the economy of Nevada, and Las Vegas in particular, was impacted quite severely with the pandemic. The unemployment rate in Nevada increased from 6.3% in March to over 25% in April. However, the unemployment rate has since declined to less than 15%.
In terms of the number of reported cases, there were few cases initially in Nevada, and the total number of cases was less than 20,000 as of July 2020 (relative to nearly 400,000 for New York). After adjusted per capita, the number of cases per 100,000 is much lower in Nevada relative to New York. Unlike New York, the continued experience of high unemployment is not a result of businesses remaining closed, but rather the lack of consumers in the state's economy. Nevada relies heavily on tourism. As people are reluctant to travel for leisure to reduce the risk of contracting COVID-19, Nevada’s unemployment remains elevated.
The total mortgage delinquency rate in Nevada increased from 1.1% in April to over 8.0% after COVID-19. The composition of the delinquency inventory (i.e., how many loans are 30, 60, and 90+ days delinquent) has transitioned month-to-month from a population concentrated in new, 30-day delinquencies to 60-day and 90-day delinquencies. Most of the inventory is made up of loans that initially went delinquent as a result of the pandemic and have continued through delinquency; many of these loans are in a forbearance program. The same pattern was observed with New York.
While the underlying demographics and housing markets are different in New York relative to Nevada, similar trends for home price growth, the average time listed, and sale inventory have been observed in both states from the start of the pandemic through July 2020. Specifically, strong home price growth, reduced average time listed on the market, and a lower seasonally adjusted inventory of homes for sale.
The number of COVID-19 cases in Florida was relatively small in May and June, and then the state experienced a significant increase in July 2020, rising from 50,000 cases for the state to over 150,000.
The unemployment rate in the state increased from 4.3% pre-COVID-19 to 12.9% post-COVID-19. The unemployment rate declined to 10.4% before reversing the trend and increasing in July to 11.3%.
Mortgage delinquencies in Florida are consistent with the pattern and level observed in Nevada. However, with the significant increase in cases reported in July, it remains to be seen whether this will translate into increases in mortgage delinquencies. This could be from borrowers directly impacted by the rise in cases or, more likely, as a result of regulatory actions to reduce the spread of the virus, which may reduce economic activity.
The housing market in Florida has remained strong through July, consistent with the other states analyzed in this article. Specifically, median home price sales in Florida have continued to rise throughout the pandemic. A potential contributor to this in Florida has been the reduced inventory of homes for sale in the state. Typically, the summer months are correlated with increased sale inventory. However, with the pandemic, many potential sellers did not list their homes, and the inventory of housing is lower than prior years in the same calendar period. However, demand has stayed fairly consistent. Reduced supply and constant demand have resulted in higher prices (in Florida and across the country).
The interactive tool available in this article highlights how the pandemic has impacted the mortgage and housing markets. While differences certainly exist between states, the general trend is consistent:
We are not through the pandemic yet, but it appears there may be light at the end of the tunnel. The number of new 30-day delinquencies has declined month-to-month, indicating borrowers who are paying their mortgages will likely continue to pay them. Further, the number of 30-day delinquencies that are not in forbearance are moving closer toward pre-COVID-19 numbers.
For borrowers who are delinquent and in forbearance, it is not clear at this time how they will ultimately perform; particularly in states such as Nevada, where the economies are heavily reliant on tourism and unemployment will likely persist even as businesses continue to open. However, if home prices continue to rise, these delinquent borrowers may be able to sell their homes in advance of a foreclosure as these homes are likely worth more than their loans. Therefore, the ultimate impact of the pandemic on the mortgage market may be relatively minor and significantly less than the global financial crisis.
1Gorst, N. & Glowacki, J.B. (September 15, 2020). The Pandemic Hits the Mortgage Market: Assessing the Impact in 2020 and Beyond. Milliman. Retrieved September 22, 2020, from https://www.milliman.com/mortgagemarketCOVID19.
2Black Knight’s August 2020 Mortgage Monitor. Press release, October 5, 2020. Black Knight, Inc. Retrieved on October 14, 2020 from https://www.blackknightinc.com/black-knights-august-2020-mortgage-monitor/.
3Data courtesy of The COVID Tracking Project at The Atlantic, license type CC by 4.0. Retrieved from https://covidtracking.com/data/download on September 7, 2020.
4Herman, Z. “State Unemployment Rates, July 2020.” National Conference of State Legislatures. Retrieved from https://www.ncsl.org/research/labor-and-employment/state-unemployment-update.aspx on September 8, 2020.
5Real estate data courtesy of “realtor.com residential listings database.” Retrieved from https://www.realtor.com/research/data/.
8New York State Comptroller. Economic and Demographic Trends. Retrieved September 22, 2020, from https://www.osc.state.ny.us/reports/finance/2019-fcr/economic-and-demographic-trends.
10Tax Foundation. Nevada: Simplifying Nevada's Taxes: A Framework for the Future. Retrieved September 22, 2020, from https://files.taxfoundation.org/legacy/docs/NV%20_TaxFoundation.pdf.