The world has experienced a new age of struggle and medical complexities in the last few months as a result of Covid-19 pandemic. Although pandemics are not a regular occurrence, insurers are now creating products that include cover against a virus outbreak — as a precautionary measure for the future. As a matter of fact, the pandemic is having a significant impact on not only the insurance sector but on almost all global economic sectors. So high is the magnitude of the change that insurers are creating products for a world where a virus outbreak or a pandemic would be considered normal.
The pandemic has forced many businesses to shut down across various sectors. The hardest hit are the ones in the travel, tourism, supply chain and logistics sector.s Many big businesses have already filed for bankruptcy, most notably Chile’s LATAM Airlines, which filed for US bankruptcy protection in May due to the pandemic.
This has made it crucial for insurers to have products at their disposal. These products are designed to cover losses incurred during a virus outbreak. The providers include big insurers and brokers introducing new products to the existing coverage, as well as niche players who are seeing an opportunity in filling the void l by offering developing pandemic-friendly products.
The pandemic has also highlighted the importance of insurance provision.. To meet the needs of their respective clients, what insurers in all sectors should do is develop more public-private partnership solutions for pandemic risks. However, some insurers already provide pandemic coverage. For example, Wimbledon has paid $31.7 million for pandemic insurance premiums since the Sars outbreak in 2003. The company is reported to receive $142 million from its insurers after the tournament which was cancelled this year due to the Covid-19 crisis.
Impact of Covid-19 on insurance sector
The coronavirus pandemic, which originated in the Chinese city of Wuhan last year, has impacted the insurance sector in numerous ways. Insurers across the globe are responding to the Covid-19 outbreak on multiple fronts, similar to all other businesses in different sectors. Now insurers are forced to respond to the crisis as claims payers, employers and capital managers. Each role carried out by then brings along its own distinct challenges — not just for the insurance industry — but for the economy and society at large.
The most immediate concern for insurers is similar to the concern of any other business amid the pandemic, which is to protect their employees, prioritise their safety as well as their distribution partners as they strive to maintain business continuity. The pandemic has challenged insurers to review, update their crisis management plans and at the same time continue to operate with a minimum of disruption to clients.
According to a report published by Deloitte, insurers should consider establishing cross-functional, emergency decision-making teams to coordinate the organisation’s response, set new safety protocols and assure quicker action as conditions continue to evolve. In its reports, Deloitte stresses that a comprehensive communications system should also be in place to keep employees, distributors,and clients fully informed about the status of business continuity plans and instructions on how to protect oneself from the virus.
The virus outbreak has also disrupted insurer’s client service starting with its distributors. Amid these difficult times, insurers have to overcome logistical challenges and deal with risk management. At the same time, direct meetings with prospects and clients have also become more challenging.
According to the Insurance Information Institute’s first quarter report called the ‘Global macro outlook,’ the impact of Covid-19 on global growth and the insurance industry is likely deeper and wider than the current consensus and could last well into the third quarter and beyond. The Organisation for Economic Cooperation and Development (OECD) in its report titled Coronavirus: The world economy at risk said that a longer-lasting and more intensive outbreak could reduce global growth to just 1.5 percent in 2020. As a result, insurers in all sub-sectors would feel the heat of a slowdown in economic activity which would undermine growth and perhaps even contract insurable exposures.
Financially, insurers will also likely need to adjust their budgets and implementation plans, cash flow expectations and investment portfolios in light of recent developments. Potential tax implications should be evaluated for the contingencies. As this situation evolves, insurers are expected to continue to serve as shock absorbers for the economy and society. Financially, the industry prepares for large loss events such as Covid-19 and should be well-capitalised for any onrush of claims. Insurers are also helped, in part, by reinsuring their books of business which is one of the ways the industry is able to spread risk.
The profitability of the insurance sector has also taken a hard hit from the Covid-19 crisis. The estimated 2020 underwriting losses covered by the industry as a result of the pandemic is approximately around $107 billion. In addition to pandemic-related losses, investment returns will remain subdued as interest rates stay low for longer, impacting life and long-tail lines in non-life. Rising corporate defaults would mean losses on invested assets. When it comes to the life insurance segment, claims payments due to Covid-19 will likely have a limited impact, with the countermeasures introduced by governments worldwide to tackle the spread of the novel virus will have a severe impact on profits this year.
The pandemic is also going to impact the merger and acquisitions in the insurance sector. According to a report published by investment bank EY, the Covid-19 crisis will not lead to any significant levels of merger and acquisition activities in short to medium term. However, the pandemic has pointed out the structural weaknesses in the insurance sector and often such weaknesses lead to consolidation, mergers and acquisitions. So in the long run we could see greater merger and acquisition activities or similar collaborations as insurers fight the crisis and do their best to survive. In its report, EY said that consolidations and wider merger and acquisition activities have been playing out across the insurance sector for many years. They do not expect the Covid-19 crisis to open the floodgates on merger and acquisition activities. Rather, they expect the crisis to reinforce and accelerate the trends that have underpinned consolidation activities in recent years.
Covid-19 has accelerated digital adoption
In the last decade, a lot has happened when it comes to technology and the changes are seen in almost all sectors. Over the last couple of years, insurtech has emerged as a niche sector. The technological adoption rate is so high amid the pandemic that businesses are now fast adopting technologies that can enable them to continue their operations while remaining compliant with social distancing rules. The virus outbreak has also forced players in the insurance sector to adopt remote and digital ways of working and simultaneously driving a wider acceleration of technology adoption.
As a result of the pandemic, the usage of online platform services such as Ping An’s Group Doctor has seen growth levels of 900 percent in China. Another platform-based insurance model that is booming in China is mutual aid through which customers pay a small fee to belong to a collective insurance service comprising 300 million members. Insurers in many regions are collaborating to develop blockchain-enabled platforms that enable the fast flow of information which in turn helps to process claims faster and make quicker payments through the online payments system.
Insurers in China, the country where the pandemic started, have already adopted many technological changes. However, insurers in other parts of the world who still remain traditional have also increased their levels of digitisation in the wake of the Covid-19 crisis. Italy’s large agent network that traditionally works through face-to-face meetings with customers has no choice now but to adopt more digital methods. Agents and brokers make up 85 percent market share of non-life business, while direct channels have never hit double digits. The situation could be a game-changer in this market,with huge shifts in how businesses are done. Although the technology existed it has not been disruptive.
The Covid-19 pandemic has forced the insurance sector to accelerate business innovation and shift more quickly from physical to digital channels and products, with end-to-end automation and optimisation of processes from intake through to claims. Mostly digitalisation in the insurance sector was limited to product level and largely focused on individual components of the value. But now the crisis has made the insurance sector understand the need of a digital transformation across the ecosystem. As a result of the crisis, the insurance sector is expected to focus more on technological innovation at almost all ends. Many experts expect to see more alliances and partnerships with insurtech startups and the greater use of technologies such as artificial intelligence, robotics and automation.
Such advanced technologies will significantly help insurers streamline and enhance processes such as pricing of its products, underwriting, claims handling, policy holder interactions and fraud management. These technologies will help insurers detect, predict and prevent fraud patterns and attacks. We should see more collaboration between insurers and cloud service providers such as Microsoft or Amazon. The crisis has been a wake-up call for the insurance sector and also an opportunity for others. In a fast changing world, the ones who adapt quickly to the changes will survive the long haul.
A new age of opportunities for innovative products and services
Over the years, insurers have launched products that protect clients from disasters such as floods and earthquakes. However, a cover against a pandemic was unheard of as the last pandemic that occurred at such a great magnitude was over 100 years ago. But things are changing fast amid the Covid-19 pandemic. According to the British risk managers association Airmic, the pandemic had contributed to a lack of adequate insurance at an affordable price and most of its members were looking at other ways to reduce risk. It is important to note that Lloyd’s of London insurer Beazley has started selling a contingency policy last month to insure organisers of streamed music, cultural and business events against technical glitches.
Similarly, Marsh, the world’s biggest insurance broker, has teamed up with AXA XL, a subsidiary of France’s AXA, and data firm Arity, which is part of Allstate, to help businesses such as supermarket chains, restaurants and ecommerce retailers cope with the challenges of social distancing. Marsh has introduced a price-by-mile insurance, which can be cheaper than typical commercial auto cover.
JapanToday reported that tech firm Machine Cover is developing products that would give relief during lockdowns. Using apps and other data sources, the Boston-based company measures traffic levels around businesses such as restaurants, department stores, hairdressers and car dealers. If traffic drops below a certain level, it pays out, despite the reason. Similarly, Elite Risk Insurance in Newport Beach, California, has been offering ‘Covid outbreak relapse coverage’ since May for businesses forced to shut down a second time. The policies sold by Elite Risk Insurance are crafted around specific businesses and only pay out when specific conditions are according to its founder.
Global consultants Capgemini in its World Insurance Report revealed that the demand for usage-based insurance has increased significantly since the virus outbreak. According to its report, more than 50 percent of the respondents it surveyed wanted it. However, only half of the insurers surveyed by Capgemini have products that meet the demand. This highlights that the needs of customers are changing, and provides an opportunity for new insurers to enter the market with superior or upgraded products that suit the needs of their customers.
Although some insurers provide policies that cover losses incurred during a pandemic, customers tend not to opt for them due to the high rate of premium related to those products. However, the Covid-19 crisis will force businesses and individuals to rethink their approach. Over the coming years, we could see multiple new products and a greater willingness from clients to opt for such products from their insurers.
Global insurance sector to grow next year despite slowdown
The Swiss Re Institute forecasts that total premium volumes in advanced markets will shrink by 4 percent this year. However, they predict the sector will return to positive growth of more than 2 percent in 2021. In the emerging markets, premium growth will remain positive in 2020 as well as in 2021. According to its reports, the sector will witness a 1 percent growth in 2020 and 7 percent in 2021. “The insurance industry is showing resilience in face of the COVID-19-led economic downturn. The magnitude of premium losses will be similar to that seen during the global financial crisis in 2008-09, even though this year’s economic contraction of around 4 percent will be much more severe. Unlike for the global economy, we expect a strong V-shaped recovery in insurance premiums, a remarkable showing considering that the world is currently in the throes of the deepest recession ever,” Jerome Jean Haegeli, Group Chief Economist at Swiss Re said in a Swiss Re report published on their website.
While insurance rates have risen for nine consecutive quarters due to large catastrophe losses and accelerating claims inflation, Fitch Ratings expects that technical profits won’t be seen until the second half of 2021 as a result of the effects of the coronavirus pandemic.
According to Fitch, the commercial insurance industry will probably report significant losses in 2020 and the first half of 2021. Fitch says as a result, the insurance sector will not return to profitability until the second half of 2021. Fitch also said commercial insurers will be hit hard by pandemic-related claims that affect event cancellation and credit and surety policies. “While, in general, pandemic-induced business interruptions have not been covered by commercial insurers since the SARS pandemic in 2003, unclear policy wording and political pressure now raise increasing doubts how successfully commercial insurers can fend off claims now,” said Fitch Ratings.
These claims will run through this year, up to the end of the first half of 2021, according to the rating agency. “Tighter terms and conditions have often accompanied the most pronounced price increases. Fitch expects further price increases for 2020 as claims inflation in some lines of business, such as professional liability, remain high and most commercial underwriters still show combined ratios above 100 percent,” Fitch said in its report.