An adversity with significant humanitarian and economic fallout

COVID-19 or Coronavirus outbreak has been rapidly proliferating, necessitating lockdown of the once-crowded cities. The uncertainty created by this unprecedented crisis is casting a deep impact on our physical, mental and economic well-being.

With financial markets in turmoil and economic activity coming to a sudden stop due to lockdowns, the economic impact of COVID-19 is already significant and is expected to increase further in the weeks to come. As economies grapple with significant cuts in consumer spending, severe disruptions to supply chains, and major interruptions in travel and tourism, the global GDP growth outlook for 2020 looks bleak.

With its significant humanitarian and economic fallout, COVID-19 presents the most serious global crisis of our generation.

Impact on the insurance industry

COVID-19 has already put to test the resilience of the insurance industry across the globe, meanwhile the overall impact looks manageable given majority of insurers in the past decade have strengthened their balance sheet and embraced digital, albeit at a lower scale than their counterparts in other industries.

Operational resilience tested: On the operational front, insurers are being tested through closure of offices and restrictions on travel – forcing them to adopt remote working protocols. New business volumes have also taken a significant hit with immediate impacts being witnessed due to lockdowns and interruptions in aviation and trade. This could result in liquidity issues as decline in premiums volume will strain cashflows and some claims payments will be accelerated due to COVID-19.

Financial market turmoil stressing solvency: The lasting impression of this event on insurers will be in the form of the financial market meltdown. Life insurers, especially the ones with capital heavy product portfolio, are witnessing significant adverse impact, primarily from falling equity markets and volatile fixed income markets since life insurers are significant custodians of long-term capital. With insurers witnessing significant losses in equity value over the past three months, this is likely to hurt solvency positions of insurers – a fact which the regulators and credit rating agencies recognized and responded through various measures like mandatory stress tests.

Manageable underwriting exposures: On the Property & Casualty side, the restrictive policy language with pandemic being an exclusion in most policies will likely limit the direct exposure to claims in most of the business lines. However, business lines such as travel insurance, credit insurance and events cancellation policies are likely to trigger increasing amounts of claims. Meanwhile, the payout of claims under business interruption (BI) policies is not yet clear as the terms and conditions of these policies are being subjected to pressure from governments and politicians.

On the life insurance side, claims are expected to be within insurers’ manageable limits.

Insurers response: Triumphing over adversity

As insurers deal with the immediate impacts of this disruption, a critical first step must be to establish a dedicated task force covering all areas of anticipated impact. Traditional Business Continuity Planning approaches may fall short in fully addressing the multitude of challenges emerging out of this global pandemic. Meanwhile, apart from addressing the near-term implications, insurers should leverage this opportunity to develop a long-term view by re-imagining their organization in the new normal.

In our view, insurers can successfully navigate the challenges by focusing on four vital dimensions:

Reference

[1] Source: Official website of the Department of Homeland Security (https://www.us-cert.gov/ncas/alerts/aa20-099a)