Type to SearchView Tags

Measuring the COVID footprint on the insurance industry
Ashutosh Uniyal Associate Vice President, Financial Services, ANZ | January 29, 2021
1682 Views

Introduction

The insurance industry has historically been correlated with economic growth– understandably, the COVID-19 crisis has resulted in a significant impact on insurers across the globe. While the industry employs new rules of work and shifting regulations with digital initiatives, some of the more direct impact that translates to lowering profits and growth are forcing insurers to cut costs and perform more efficiently at the same time. At the same time, the pandemic has caused a shift in customer preferences and has rewired the central circuit of the economy, which is indirectly affecting the insurance sector on all scales. Read on to understand the nuances of COVID-19 and insurance, and how businesses are responding to these challenges.

Direct impact

While the pandemic has resulted in increased claims across certain sectors for insurers, the new post-COVID-19 digital economy shows promising avenues for growth. Here are some areas of the immediate impact of COVID-19 on the insurance industry:

  • Travel, health, and hospitality: While the impact of the pandemic on travel and hospitality is obvious, new measures are being taken to stimulate and recover activity in these industries. The health insurance sub-sector expects increased demands, and underwriting thresholds are invariably expected to rise too. As a result, while some companies are adding new boxes to check on applications for health cover, others are lowering the ceiling of age at purchase.
  • Contingency covers: The pandemic has resulted in cancellation or delay of global events. Despite constituting a relatively small share in the industry, the losses in this sector have been massive– some have reported losses in the hundreds of millions of dollars.
  • Cybersecurity: As the global digital economy grows in size and scope amid the pandemic, the cyber insurance sector is showing strong growth. However, the growing risks and nature of threats have negatively impacted the loss ratios in this sector.
  • Commercial credit: Due to COVID-19-related supply chain disruptions, claims arising from non-payments and defaults are expected to rise. While this impact has not yet been observed, the effects are likely to be seen after the threshold for such policies is reached.
  • Superannuation: The Australian Prudential Regulation Authority notified superannuation trustees to expedite requests for early access to superannuation funds to affected individuals. This has led senior management at these organizations to review and assess their liquidity reserves.

Indirect impact

As we discussed, the pandemic has rewired the core circuitry of the global economy. As a result, some of the indirect impact of the pandemic on the insurance business includes the following areas:

  • Customer preferences and behaviours have shifted. No-touch sales and underwriting processes are the wants of the post-pandemic customer. Moreover, rising unemployment rates have left customers to reassess their spending priorities– therefore, in the personal line, digital has become the enabler rather than a differentiator. However, the commercial line remains more vulnerable than the personal line.
  • Due to mobility restrictions, vehicle miles traveled (VMT) are greatly reduced. Reduced vehicle sales mean shrinking volumes. However, reduced VMT has improved loss ratios in the auto insurance sector as a result of reduced traffic, and consequently, collision-related claims.
  • Small businesses are the most vulnerable during economic fallouts– in Australia, small businesses account for 35% of the GDP and employ 44% of the workforce. Therefore, the small commercial segment is expected to be hit hard, across both property and liability.
  • The pandemic has also impacted business operations globally, testing the business continuity efforts of historically resilient organizations. According to the Australian Bureau of Statistics (ABS), 90% of Australian businesses will be impacted by the pandemic. Business interruption coverage is seeing mixed signals– while some business leaders are reinstating the impossibility of covering COVID-19-related losses, some jurisdictions are reinforcing otherwise. This is leading governments to revise reserve requirements, while insurers are already assessing their claims reserves. Moreover, exclusion of the pandemic as a criterion for coverage threatens the relevance of such offerings.
  • In commercial insurance, specialty lines are suffering too. While marine and aviation have suffered from decreased travel, others like construction and energy are suffering from low volume due to low economic activity, workforce restrictions, and mobility restrictions. Profits for insurers from these sub-sectors are suffering as a result.

The response so far

By the end of 2019, top insurance players had delivered an annual Total Shareholder Return (TSR) of 20% since 2014. However, by the second quarter of 2020, the insurance sector underperformed the market by 12%. The insurance industry’s correlation with economic growth and fallouts is clear. However, the challenge of mid-term uncertainty and opportunistic factors of growth should be the focus of senior management teams. The shifting shape of global logistics and rising digital adoption across industries show new possibilities for growth to insurers. While other industries grapple with the question of business continuity, insurers must take a digital-first approach to enable their operations.

To bring coherence to your business strategy, bridging the gap between the declining volume of sales, and revamping the outlook of risk managers, should be the top priorities on the agenda. In other words, this is the hot ticket to strategically align the post-COVID-19 insurance company with its business imperatives.

Top players in the industry are responding to the pandemic by shifting their focus inwards and revitalizing the operational infrastructure of the insurance enterprise with integrated customer relationship management (CRM) platforms. This is helping companies accelerate sales inline with evolving customer preferences. Others are partnering with technology leaders to prototype and develop innovative products and business models. While uncertainty looms, insurers must deploy disruptive technologies to reinvent their core for mitigating both the short- and long-term impact of the pandemic.

Insurers must deploy disruptive technologies to reinvent their core for mitigating both short- and long-term impacts of the pandemic.

References

  1. https://powerobjects.com/thanks/the-insurance-industrys-plan-for-recovery-from-covid-19/
  2. https://www.pwc.in/assets/pdfs/services/crisis-management/covid-19/covid-19-impact-on-the-indian-insurance-industry.pdf
  3. https://www2.deloitte.com/global/en/pages/about-deloitte/articles/covid-19/understanding-covid-19-s-impact-on-the-insurance-sector-.html
  4. https://www.mckinsey.com/industries/financial-services/our-insights/coronavirus-response-short-and-long-term-actions-for-p-and-c-insurers
  5. https://www.mondaq.com/australia/operational-impacts-and-strategy/932814/covid-19-and-regulatory-implications-for-superannuation
  6. https://www.ifc.org/wps/wcm/connect/eaebcd1f-5b9f-467e-b6cf-b4d616842375/202006-Women-Insurance-COVID19+B.pdf?MOD=AJPERES&CVID=ncQxy4V
  7. https://www.bcg.com/publications/2020/insurance-value-creators-report
  8. https://www.business-standard.com/article/economy-policy/coronavirus-trade-credit-insurance-sector-may-see-rise-in-claims-120040400043_1.html
  9. https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-small-business-counts2019.pdf
  10. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=ACE10&paper_id=35
  11. https://www.mckinsey.com/industries/financial-services/our-insights/implications-of-coronavirus-for-north-american-life-and-annuities-writers
  12. https://www.abc.net.au/news/2020-03-26/coronavirus-economic-impact-in-australia-abs/12092488