The insurance industry is generally well prepared for major loss events including a pandemic like COVID-19, but the financial impacts will definitely take time to play out and will be insurer specific. Insurers have to deal with the COVID-19 outbreak on multiple fronts with respect to insurance- as claim payers, employers, and investment managers. Each has its own distinct challenges not just for the insurance industry, but for the global economy and society at large.

Potential long-term impact on insurance companies:
It is expected that the financial impact of Covid-19 upon the insurance industry will be specific to the circumstances of each enterprise-

  • Failing the equity market and interest rates put pressure on the insurers’ balance sheet, product profitability, and investment management fees.
  • There will be some time lag for insurance claims to be assessed and paid to the insured.
  • Insurance companies with well-diversified risk portfolios will be the most insulated from losses arising from COVID-19. Conversely, those with the high concentration of classes of business most exposed to coronavirus, could be adversely impacted.

Pandemics are not a ‘Black Swan’ event for the Insurance sector especially with respect to life and health insurance business lines; pandemics have been the most important mortality and morbidity exposure. Experience since 1918 illustrates that pandemics are more of one in 30-year events, well within the risk tolerance of insurers.  Solvency and capital regime include both capital requirements and solvency assessment rules. Insurance supervisors give attention to it as part of their review of reinsurance plans and through the increasingly prevalent ‘Own Risk and Solvency Assessment’ (ORSA) exercises required by the insurers. Even the smallest of the insurers would consider excess death numbers when putting reinsurance programs in place.

Covid-19 does not fall short of placing certain challenges in the insurance sector. A vulnerable country may or may not have an insurance sector that is playing a role. When the country is vulnerable and has an insurance sector then the question is whether the Insurance sector can manage and mitigate the vulnerability. When a country has a nascent insurance sector, the responsibility remains with governments and the population many of whom are unable to handle adversity in ordinary times, let alone in a crisis. Let’s now discuss the nature of the impact of a pandemic like Covid-19 on insurance industry which is primarily of three types:

Insurance obligations:
Term Life Insurance: The new business premiums of life insurance companies declined 32% in the month of March, owing to the destruction caused by COVID-19 and the subsequent lockdown imposed by the government to contain its spread. For the month of March, the new business premiums of life insurance companies stood at Rs 25,409 crore compared to Rs 37,459 core in March 2019. The private life insurers, 23 in total, saw their new business premiums decline by 34.21 percent in March 2020 at Rs 8,342 crore compared to Rs 12,682 crore in the same period of the last financial year. The last quarter is very significant for life insurers due to heavy sales, but with the lockdown, the business of life insurers was impacted severely. Thus, they are changing their strategy and moving more towards the online distribution model. But so far, the digital channel contributes 3-4% of the business.

However, the insurance companies are hopeful that Covid-19 will nudge policyholders to buy more protection products in the future. Besides this, the industry staring at the challenge of increased death claims, which are rising exponentially day by day.

Health insurance: On March 11 WHen WHO notified coronavirus as a pandemic, certain health insurers clarified that they are no longer obligated to entertain defined benefit claims. Despite this, there are many health insurers like Aditya Birla Health Insurance, Bajaj Allianz General Insurance, and Edelweiss General Insurance who have come forward and clarified that they are still providing cover for coronavirus. Also, many insurance companies have come out with Corona specific plans, Star Novel Coronavirus (nCoV) (COVID-19) Insurance Policy, Digit

Healthcare and ICICI Lombard’s Novel Coronavirus Policy to cover all those who test positive for COVID–19. However, cost implications extend beyond direct interventions for COVID cases. For example, health service supply constraints push up costs, and social upheaval is expected to impact mental health service demand, and mental illnesses are well covered under health insurance policies.

Travel insurance: Standard travel insurance policies covered trip cancellations for events outside of your control like illness, injury, or death of the traveler or non-traveling family members or natural disasters. However, they are not likely to cover trip cancellation due to the fear of COVID-19 as it was declared a pandemic and these policies have a pandemic exclusion. However, if a person contracts COVID19 before the trip and thus needs to cancel it, he shall be covered as the event comes under illness or death. If a person contracts COVID-19 during the trip, then the medical coverage depends upon his travel insurance policy.

Business Interruption policy: Such policies typically cover loss of profit for the period business is disrupted as well as fixed expenses incurred during that period. However, their coverage cannot be triggered by this pandemic as the property may not have suffered any physical damage due to a covered peril such as flood, earthquake, or fire.

Asset values and liquidity:
In the wake of COVID-19, questions about insurance companies’ solvency positions have been raised. So, what are the potential hotspots for insolvencies? These include small or medium-sized insurers, private equity-owned enterprises where the drive for ROI leads to minimum capital injected and thinly capitalized companies (where a company is financed through a relatively high level of debt than equity).

What is driving these solvency ratios down?
What we need to analyze here is the impact of financial markets on solvency ratios. This, in fact, is dominating the discussion more than the impact on underwriting risk (morbidity, mortality, catastrophes, premiums, and reserves).

Global insurers today are managing more than $20 trillion in assets under management, and more than 50 percent of those assets are government bonds. Some of the key drivers of the reduction in the solvency rates related to it are:

Low-Interest rates: Low rates for both government and corporate bonds are being observed by many countries today due to the global economic downturn.

Downgrading bonds: Bond ratings are constantly being lowered which drives the need for many insurers to rebalance their portfolios into higher-rated bonds, thereby realizing and locking in losses.

Credit risk: That is a heightened perceived risk of default and ballooning credit spreads (When the market participants favor government bonds than corporate bonds, typically when economic conditions are expected to deteriorate).

Volatile equity markets: The level of extent of equities in the portfolio combined with the inherent volatility of the selected equities, today’s volatility has been increasing in nearly all markets.

Operational Challenges:
Given the economic destruction, providing for claim becomes even more costly. The risk of fraudulent claims over a range of insurance lines increases when economic conditions deteriorate, particularly with an increase in unemployment.

It has also been forecasted that in the medium-term and long term period, the premium on many products will face upward pressure, leading to reduced business volumes and erosion of solvency.

Conclusion:
In the short term, assistance to insurance supervisory agencies by the World Bank Group becomes critical, particularly in the more vulnerable places. It can provide support on short term capital forbearance initiatives, risk management assessments and stress testing obligations (assessing the potential impact of different economic scenarios, it is not related to predicting the future, but about identifying and adjusting for downside risks).

Secondly, Covid-19 will propel insurers to increase the digitization of their operations and interactions with clients. This could have significant impacts on the real estate industry as insurance might not be the only industry thinking in this way. This is one area of many that the Covid-19 is bringing into focus. But mostly, this is for the future. Right now, in an increasing number of countries, insurers are working around the clock to support their own people, customers, distribution networks and partners as they deal with the immediate issues at hand.

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