How the insurance industry can emerge stronger

Mon 04 Jan 2021

There is little doubt that Covid-19 has had a significant impact on insurers, but there were already factors in play that were adding pressure on the insurance industry. What covid-19 has done is to create new challenges, as well as bringing existing challenges to the foreground. Looking ahead, the actions insurers take now to deal with these challenges will play a role in shaping a ‘new’ insurance landscape.

Short-term impacts of Covid-19

If we take the challenges of covid-19, there are both positive and negative impacts depending on the line of business. On the Property & Casualty (P&C) insurance side, Non-Damage Business Interruption cover (NDBI) has clearly been hard-hit with ongoing disputes and litigation still in play over payouts for business interruption during the pandemic. With few exceptions, such as the All England Lawn Tennis Association (AELTA) whose policy specifically covered the pandemic, there is a call for insurers to remove any ‘grey’ areas in contracts. This includes improving policy wording to give clarity to policyholders on an affirmative coverage basis, all of which are vital from both reputational and risk management standpoints.

On the other hand, lower levels of claims on some business lines such as motor insurance due to lockdown restrictions have been positive, albeit insurers are under pressure to pass a certain level of gains on to policyholders. Of course, outcomes will very much depend on the line of insurance business.

Achieving the right balance

From a reputational perspective, the industry now needs to regain policyholder trust and find solutions to fill the protection gap that currently exists. Going forward, however, there is a lack of appetite by insurers to provide cover for pandemics due to the systematic nature of this risk and impact on premiums should a future covid-style event occur. One solution on the table is to develop public-private partnerships similar to natural catastrophe (Nat Cat) schemes in France which may provide a format for providing protection that covers pandemic-type events in future.

On the P&C side, if, as expected, we move from a soft to a hard cycle in the next two to three years, whether any increase in premiums or higher deductibles will be sufficient enough to recuperate economically from COVID and the increase in frequency of claims, is not clear at present.

On the life insurance business side, sensitivity to the market environment is a major factor and any increased pressure on financial performance is down to the constant low interest rate environment, rather than covid-19. So there is no direct impairment to insurers’ financial stability or strength as a result of the pandemic. Although the general increase in financial volatility in the market caused by covid-19 does add to pressures suffered by insurers, indirectly impacting Life Solvency II ratios, profitability, and P&L volatility.

What options does the insurance industry have?

Raising premiums aside, insurers have a number of options to help mitigate the various impacts caused by covid-19, low interest rates and climate change-related events. In particular, the increased frequency of Nat Cat events and health crises needs to be tackled through smarter monitoring of exposures, but also by insurers getting increasingly involved in prevention education.

Other options include looking to run off costly insurance products, disposing of less profitable business lines as well as setting up new reinsurance schemes. In terms of changing the business mix, the move from guaranteed savings products to unit linked contracts where the financial risk is borne by the policyholder continues. Further business drivers include a focus on products with less liquid guarantees or products with higher margins that fulfil a change in societal demand such as health products

On the asset side, there is a need for the insurance industry to shift towards a more environmentally responsible investment strategy that focuses on the non-carbon and green industry. This approach not only responds to market expectations on investment policies but also sends a clear message to the market and customers alike that the insurance industry is changing for good.

Added to these challenges are continued strong regulatory constraints and new risks on the horizon. This is not only from a capital perspective, but also from a know-your-customer and data protection standpoint. New risks are also beginning to emerge. Similar to the pandemic, cyber risk cover is one where policy wording needs careful attention if a similar issue on policyholder understanding of what is and isn’t covered is to be avoided.

Need to accelerate the digital journey

To achieve these aims, there is a need for the insurance industry to accelerate its transition to a fully digitalized operating model. Working remotely due to lockdown has been a further trigger for the insurance industry to transition to a structure that will enable it to compete with more digitally advanced financial service providers; a structure that helps transform distribution channels, employee relations and adds value to customers as we emerge from the pandemic.

The use of technology such as blockchain and artificial intelligence (AI) will be crucial in helping insurers to achieve these aims. By harnessing state-of-the-art technology, insurers will be able to analyse and monitor data to not only help reduce risks and exposures, but improve the customer journey.

There is little doubt that while insurance exists to fill protection gaps, its response to recent and ongoing challenges will impact how it operates in the future. A clear program of transformation that embraces the digital age to better respond to protection needs in a transparent, open and fair manner in a consistent format not only shows the market that the industry has understood the lessons of covid-19, but it understands policyholder needs and the important role in society the insurance industry plays.