As we all know, Covid-19 has caused severe disruption in all fields of business and the insurance industry is no exception. The increased uncertainty that is now present in every aspect of life has had profound effects on this industry, which actually didn’t envisage such a situation at the start of 2020. Nowadays, insurance companies, as organizations dealing with quantifying and managing risks, are working hard to respond to the newly arisen challenges. So, what kind of impact are they coping with?
Pricing the pandemic risks
The premise of insurance is a transfer of risk. Policyholders (individuals) swap a potentially large and unknown outgoing for a known, smaller outdoing (the premium paid) with an insurance company. The insurer then pools all the risks together and, in doing so, seeks to forecast, manage and pay out claims. However, the multi-faced nature of the current pandemic means that many lines of business where there is insurance coverage have been affected significantly. Such effects range from business interruption (e.g. disruption to supply chains and inability to operate as normal due to government measures), trade credit insurance (cover for businesses if customers who owe money for products or services delay payment or do not pay at all), travel, cyber liability (due to increased working from home) and event cancellation.
The scope of problems
It's true that many insurers have considered and priced pandemic risk into their insurance risk, the global effects of COVID-19 have proven to lie beyond the realm of regular expectations. Another obstacle is the fact that there is a lack of historical data to base predictions on, which means that the pricing of pandemic risk within insurance has not been fully understood and allowed for. Finally, many companies are facing the consequences of previous misconduct. For example, up to 100,000 Australians who may have been slugged with excessively high insurance fees by Westpac could be eligible for compensation following the current Westpac Class Action Refund campaign.
COVID-19 and life insurance
To begin with, the tragic human toll has really affected life insurance and annuity coverage. With so many premature deaths, insurance companies are now redrafting their policies to include a reduction in the expected longevity. The mortality and longevity risks offset each other, to some extent, by acting as a natural hedge, which is why the net change in pandemic-related mortality liability is expected to differ significantly between life insurers, depending on the balance of the product mix that they have underwritten.
Many regulatory regimes require that insurance companies manage their solvency capital requirements in line with their risk profile. Therefore, we can expect discussions with regulatory supervisors regarding assumptions around solvency capital requirements.
Needless to say, financial markets have experienced major change and volatility since the beginning of 2020 and with life insurance companies holding significant assets to cover their liabilities, changes in financial markets have had serious implications. Though equity markets have, in general, recovered from the significant drops experienced earlier in the year, future volatility and decreases in equity values remain significant threats to solvency ratios. Also, lower interest rates have repercussions for life insurance companies, as they are particularly sensitive to long-term interest rates. Finally, the net effect on balance sheets will depend on the asset duration compared to the liability duration. Life insurers typically have liabilities that are longer in duration than the assets available in markets. Hence the net effect of a long-term reduction in interest rates on balance sheets is likely to be negative.
The pandemic and general insurance
Although there were concerns that health insurers would experience significant additional payouts from an increase in Covid-19-related hospitalizations and treatments, the evidence to date suggests that the COVID-19 impact on health insurance companies has been smaller than expected. This is most likely due to the fact that most diagnosed individuals have been able to self-isolate successfully at home rather than being hospitalized. Also, there has been a decline in non-Covid-19 claims, which has offset the expected impact from Covid-19 claims.
On the other hand, general insurance has been affected in various ways by the pandemic. For example, travel has been severely disrupted, affecting travel policies. Motor claims have also been affected because lockdown measures have resulted in an unprecedented drop in the number of road users, leading to a drastic fall in the number of motor claims from accidents. Theft claims have also decreased as both vehicles and vehicle owners have remained at home.
Is there any positive news?
While the pandemic has caused severe disruption and economic fallout for insurance companies, we could say that this situation could be a catalyst for some positive change. Namely, insurance companies have been forced to consider how they operate and focus on becoming more agile and digital. Remote working has led to a realization that many operations can be undertaken away from the office and regulatory supervisors have been encouraging the use of digital channels with initiatives such as encouraging digital service delivery and relaxing previous face-to-face requirements. All this could lead to significant cost savings with reports of employers typically saving about $11,000 annually for employee working remotely half of the time. A new agile, digital workforce may also result in happier, healthier and more productive employees who have less commuting stress, greater location autonomy and a better work-life balance.
If we analyze the current situation, we can rightfully conclude that the pandemic has affected all businesses, including insurance companies. However, it’s still difficult to predict the long-term impacts of the pandemic, but we may assume that insurance companies are yet to fact many changes and challenges, some of which can be seen as opportunities for changes that would make the industry regain its position and thrive in the future.