Do insurers have COVID-19 covered?

What are the implications of COVID-19 for the insurance industry? And what longer-term trends might the outbreak serve to usher in for the future.

The Covid-19 coronavirus outbreak that began in China towards the end of last year has now become a global pandemic. Although it now appears to be slowing in China, the spread of the disease is accelerating elsewhere, with the World Health Organization recently describing Europe as its current `epicentre'. Governments are reacting in ever more dramatic ways, closing borders, imposing lockdowns and travel restrictions, shutting schools and colleges, and banning mass gatherings such as sporting events.

The way the crisis will run from here cannot be known. But alongside the tragic human toll, it is already having considerable economic impacts, posing major challenges to the global supply chain and certain business sectors such as airlines, travel and leisure, and causing significant stock market volatility and some precipitous falls. Central banks including the US Federal Reserve and the European Central Bank (ECB) have responded by cutting interest rates. The ECB has expanded its quantitative easing program to make more liquidity available and the Fed could follow suit after the US joined many other countries in declaring a `national emergency'.

A crisis such as Covid-19 affects all business sectors  - but it especially puts a spotlight on insurers who can expect to be inundated with general inquiries and claims across multiple different lines, whether that be for health, life or non-life cover.  Balancing the need for responding to this influx of activity in the contact centres with a quickly shifting remote workforce is an area that insurers are working to address. Of course, countries are at different stages of coronavirus activity. 

So, how is the insurance industry likely to shape up to the unfolding crisis? What are the implications across the different segments of the industry? And what longer-term trends might the outbreak serve to usher in for the future?

Limited exposure for General Insurers?

Starting with non-life or general insurance first, I expect the impact on claims to be relatively manageable. Most insurers learned the lessons from the SARS outbreak of 2003 and introduced exclusion clauses for communicable diseases and epidemics/pandemics into most non-life products such as business interruption and travel insurance. 

Business interruption policies usually pay out only if physical damage occurs to an organization's assets or operations  - so coronavirus related claims may not be covered, but there is potential for future disputes on this issue. Travel insurance, meanwhile, may offer cover if a customer is diagnosed with the virus before or during their trip  - but not for travel that is cancelled because of the pandemic, unless a customer has taken out premium `any cause' cover, which very few have.  Of course, interest in `premium' policies could change in a world after COVID-19.

Event cancellations may cause greater losses to insurers as some large events (but certainly not all) have policies that may cover them even for epidemics or pandemics. The largest event taking place this year is the Tokyo Olympics where analysts estimate approximately $2bn of coverage.   

It is likely that the reinsurance sector will bear some of the brunt here, as insurers claim back the costs of cover from them over a certain threshold. One major global reinsurer, for example, has been quoted as having exposure of over 500 million euros should all events covered for pandemics be cancelled.

However, there are two potentially big areas to watch for non-life. Firstly, trade credit insurance, covering businesses against debts that cannot be paid by their customers or suppliers. This is an $11bn global market  - and if increasing numbers of companies go out of business due to coronavirus impacts, insurers could face rapidly spiralling claims. There are particular concerns that, alongside some big corporates in acutely affected sectors, SMEs in many markets could be hit hard due to supply chain disruption and a crunch in business levels. The cost of this may very much depend on just how bad the pandemic becomes, the extent to which containment measures affect different kinds of businesses, and how long it lasts.

The second area is workers' compensation claims. We could see spikes in workers claiming they were not adequately protected by their employers against exposure to the virus brought about by their normal working duties. It is impossible to know at this stage how significant such claims could become. But insurers offering this type of cover to employers may need to brace themselves, depending on how things develop.

Finally, the volatility and falling interest rates within the financial markets will likely impact general insurers from an earnings and solvency perspective.  The impact is likely to be greater for life insurers and therefore is addressed in more detail below.  

A mixed diagnosis for Health Insurers

The impact on health insurance is hard to determine at a global level because the impacts will be very different country by country. This is both because the number of actual cases and deaths could vary greatly between countries/regions, and because of the varied make-up of health coverage itself. In some countries, such as the US for example, most healthcare is privately provided (except for the elderly where Medicare plays a big role), while in others, such as Europe and Canada, there is much higher public provision.  In Asia, the national health systems are often immature and there is much private coverage.

The key issue currently in most countries is to enable rapid testing of individuals, particularly people in vulnerable populations such as the elderly or those with underlying health conditions, especially compromised immune systems. In most countries, this testing is free (provided by governments) or the costs are being waived by healthcare providers and/or health insurers. Free treatment, however, is not universal and these costs can be substantial. 

As yet, we simply do not know what the ongoing treatment requirements and eventual mortality or morbidity rates from the coronavirus will be and therefore what the cost might be for health insurers. 

However, I believe that the crisis may have a number of long-term (positive) effects on the sector. Firstly, as the pressure on health services rises due to the sheer number of patients, we are likely to see a rise in telehealth services, offering consultancy to patients via phone or online video services. This could have constructive long-term effects, helping healthcare reach more remote and less affluent populations including the under- or un-insured. Making healthcare more available and accessible means that, in some small way, societies may benefit from learnings and actions taken during COVID-19 

Secondly, the very pandemic itself may cause more people to reconsider their individual health insurance needs. In the wake of the SARS epidemic, for example, we saw a temporary spike in critical illness policy sales in Asia. We may see a similar phenomenon post-coronavirus, with rising sales of health insurance, critical illness and even life cover across the world.

Market volatility creating more difficulties for Life & Retirement Insurers

Of all insurance segments, it is life insurers who are facing the most difficult challenges.   The industry is closely monitoring the potential impacts on mortality rates, however, we expect that life insurers may also feel significant impacts due to what is happening in the financial markets. 

Because of the long-term assets and liabilities that life insurers hold, market volatility is always challenging for the sector  - and we have seen extreme volatility in recent weeks. Major exchanges around the world have experienced some of their worst falls in decades, even if ground has later been made up again. Movements in equities, interest rates and credit spreads create tremendous asset liability management risks for life insurers as yield curves flatten.

Globally, life insurers manage more than $20 trillion in assets and as much as half of this is estimated to be in government bonds. But the yields from these have fallen dramatically  - US 10 year bond yields have more than halved since the end of 2019 for example.   The crisis also puts pressure on non-Government bonds which may cause credit concerns and may lead to an increase in bond downgrades.

In addition to this, as noted earlier, central banks have been slashing interest rates. We were already in a low interest rate environment  - which is always difficult for insurers in general, but especially for life insurers - now rates are heading down even further (possibly below zero in some countries). Legacy businesses or products that are highly sensitive to market variables such as variable and fixed annuities, long-term care insurance and universal life insurance are likely to feel the effects more deeply. 

All of these factors can result in solvency ratio challenges. Prior to this COVID-19, much has been said about the industry being well-capitalized and so insurers may be starting from a position of strength as it relates to capital. However, risk-based capital approaches vary widely by country which impacts how reactive the ratios are to current market conditions. For example, the EU's Solvency II regime is very sensitive to financial market volatility and movements in bond yields and credit spreads. Other capital approaches could be sensitive to bond downgrades. As a result, insurers will need to closely monitor solvency ratios in order to meet economic, regulatory and rating agency capital requirements.

The sector will be hoping that the pandemic blows itself out before long. Otherwise, if market volatility continues and fluctuations persist, they may need to reassess their investment portfolios and exposures to potentially reduced investment earnings as well as protecting capital/security for policyholders and key stakeholders.

Be Cautious about the cost-cutting response

Clearly, this year could prove to be a difficult one for many insurers given the predictions of the economists, some of which are saying that a “U” shaped or even a “W” shaped recovery pattern may be more likely now (as opposed to “V” shaped). Early questions are starting to emerge around possible recessions around the world. Why? We've seen such varying virus containment efforts which dramatically impact consumption levels on a local level and therefore impact speed to recovery. Expectations vary on the long-term impacts; no one can be entirely sure. 

While it is tempting for insurers to suspend investment and cut costs in such a challenging financial year, I believe the crisis creates an incentive for them to do the reverse  - continue to invest in how they operate and create a more agile, digitally-enabled business. In other words, now more than ever insurers should keep investing forefront in their minds so that they can be prepared for the future.

By this I mean firstly embracing the flexible and remote working that will be needed across all sectors due to the virus, insurance included. The crisis provides the opportunity for insurers to test and ensure that their businesses have sufficient connectivity to support more staff working off-site and in flexible ways  - now, and for the future too.

What this means today is that management teams should be rapidly assessing operational areas with high concentrations of human capital support  such as call centers, claims, shared service centers, etc. to determine the impact. Business disruption or resiliency plans are being tested, stressed and in some cases derived.  This is especially true in areas where there is a lack of digital workflow tools, limited virtual or mobile work station capabilities or unscaled communication technology.  These traditional methods are often used for completing moderate to more complex processing activities that require a team approach to resolution.  This situation is allowing for a significant shift in the adoption rate of new ways of working, including the supporting technology, which may change the ways organizations are run post crisis.

Speaking of technology, the crisis could also be the spur to look at moving more systems and applications to the cloud  - an area that insurers have lagged other sectors in. With more people working remotely, having systems in the cloud offers much greater bandwidth and capacity than if staff are accessing on-premise servers remotely. This is an opportunity for the insurance industry and could be the catalyst for this movement. Actuarial modelling software, for example, often sits on individuals' computers, as there are deemed to be security issues with putting it in the cloud. But with today's cloud services offering enhanced security protocols, perhaps the time has come for more of the industry to make the move. 

More broadly, insurance businesses  - as other sectors  - need to embark on the digital transformation of their organizations, to become more agile, responsive and connected enterprises. Perhaps one legacy of the coronavirus crisis could be that it actually propels more insurers to do that.

These are extremely challenging times for individuals, families, businesses and indeed whole societies and economies. The insurance industry has a key role to play in supporting customers and societies through the crisis and the recovery.