- The German insurance market shows some fundamental phenomena in context with the corona pandemic. For instance, insurance companies report an increase in cancellations, deferrals and premium waivers, especially in personal insurance.
Are there similar trends in the English market?
How do you assess the development of the market?
Generally, there is a higher likelihood of an increase in return premiums where these clauses exist; e.g. if ships are not allowed to sail due to ‘lockdown’ measures. This would need to be accounted for in the reserves. However, some policies may have minimum level of premiums so terms and conditions will need to take into account. There may be an increase in policyholders lapsing their policies, as they self-quarantine, perhaps have a reduction in household income, and decide an insurance policy is a less pressing expense compared with other household expenses. Overall, we expect that many insurers will see a reduction in the premium written in the short term, driven by a general slowdown of economic activity as well key functions being absent.
It is also worth considering if the underlying exposure has changed – and how insurers will want to reflect this in premiums (or maybe even refund premiums). For example, commuters who drive to work but who are now working from home are less exposed to accidents. Some motor insurers have already begun refunding motor customers with others following suit. This will be valuable to policyholders who may themselves be in need of cash. An alternative to refunding these premiums is to offer additional value added services for free, such as paying for the cost of delivering groceries, vouchers for food shopping or medical testing. This will show how the insurer is thinking about their customers. It will also help manage insurers’ cash outflows.
Insurers need to give careful consideration about to how best to deal with their customers, especially during the Covid-19 pandemic. While the Treating Customers Fairly (TCF) initiative primarily applies to personal lines customers, the considerations discussed below do also apply to commercial lines customers, especially in the Small and Medium Enterprise (SME) space. Treating insurance customers fairly has always been at the heart of the insurance industry. However, when push comes to shove and an extreme situation such as Covid-19 arises, treating customers fairly becomes more difficult as insurers try to balance their customers’ needs with their own financial viability. Insurers could be susceptible to both conduct and reputational risk which arise when there is a mismatch between a policyholder’s prior expectation and the insurer’s intent with respect to claims.
The main risks faced by insurers If insurers are not willing to pay, even when liable, insurers will take a reputational hit. In turn, this impression has a knock-on impact that affects the reputation of the industry as a whole.
- How does Covid 19 affect insurance sales in the UK?
Do you expect a drastic change in the popularity of different sales channels?
What products benefit from the pandemic and which ones are mostly negative affected?
There will likely be an increase in demand for certain lines of business. This could be due to policies being taken out to guard against the effects of coronavirus. For example event insurance (whether this may be large public events such as sporting events or private events such as weddings) or business interruption policies.
However, we are already seeing insurers react to this uptick by firms reviewing their policy wording. This is being done to reflect only the perils that their pricing teams and underwriters have allowed for when setting premiums, or simply to exclude coronavirus impacts such as delays or cancellations in flights to control cost of claims. The impact of this could outweigh the increase in demand for the types of products above.
There has been a definite impact on distribution. Personal lines sales are being shifted online as well as call centres are being freed up to manage vulnerable customers alongside other resource difficulties. For commercial sales, the Lloyd’s underwriting room was closed physically which forced more telephone communication rather than face-to-face. More technology has been seen from apps (personal lines) to e-placements (Lloyd’s) following further immediate investments in technology to keep business going. Will this continue? Perhaps, but the industry has a tendency to respond to crisis first, long term second.
In a sense, the shift to online is Europe lagging behind Asia where most personal lines insurance is done via app, and not necessarily an insurer’s app.
- Switching the perspective to insurance claims. What effects of the pandemic on claims do you experience in general (in Germany they´re very heterogenous)?
Which lines of business are affected in a positive or negative way?
How does this translate into claims reserving and into pricing?
Changes in claims will depend on the line of business and the exposure of the business. We expect some of the most materially affected lines to be travel insurance, trade credit insurance and events insurance. Non-property-damage business interruption losses presents a unique challenge to the insurance industry. Insurers should expect Covid-19 to lead to a surge in claim numbers for some lines of business; e.g. travel insurance, business interruption and trade credit. It is noted that simply having an insurance policy does not necessarily mean claims will be paid. Policy wording is key. Many non-life insurers had already tightened up their policy wording following the outcome of similar outbreaks in the past (e.g. SARS in 2003) to avoid an increased number of claims resulting from uncertain perils, such as the coronavirus
Nevertheless, consider Directors & Officers or business interruption insurance. Here we could see a number of insurers facing an uptick of claims due to poorer management decisions being made in a time of uncertainty, or supply chain breaking down. Event and festival insurance would have already seen claims increase. A key looming potential claim to the market could be the 2020 Summer Olympics, with one source suggesting an insured loss of c $800m.
(Re)insurers should reassess whether their reserves are sufficient, given their exposure. The impact on each firm depends significantly on the risk profile of the business, including types of insurance product underwritten, reinsurance arrangements and level of free reserves. The risk profile may differ between the short and medium terms.
Insurers should expect Covid-19 to lead to a surge in claim numbers for some lines of business; e.g. travel insurance, business interruption and trade credit. Claims paid will depend on each policy’s terms and conditions, with many not resulting in any payouts. However, insurers should be careful when handling these claims, especially where policyholders have an expectation that claims will be paid, to avoid potential reputational damage.
In assessing whether reserves are sufficient, (re)insurers will also need to consider policy wording, as it is not always clear how general (re)insurer’s reserves will change due to the possible opposing effects of Covid-19 within the same line of business. (Re)insurers should also assess their net exposure to determine if there are any potential reinsurance or retrocession dispute or gap in their cover.
There is now also a growing class action law suits against a number of insurers on business interruption. In the UK, the test case is currently in progress with a ruling expected soon. If the class action is successful then we can expect to see a marked increase in business interruption claims.
Covid-19 has already changed the economy and people’s behaviours. Many believe that this impact will last for quite some time and a new normal will emerge. What will be our new normal and its impact are still largely unknown at this stage. Pricing actuaries should weigh up different possibilities and stress test their pricing models and business plans where necessary. Pricing is interlinked with the business plan and so revisions in one will need to go hand in hand with revisions in the other. Areas such as expenses and the new normal, will need to be looked at more closely when insurers are assessing their business plan for this year.
The ongoing principles of sound pricing and treating customers fairly continue to apply, perhaps more so than ever before. How insurers behave with respect to pricing will have an impact on the perception of policyholders. Insurers will need to tread carefully so that the hardening market is not seen to be an opportunistic play by the industry to cash in on the Covid-19 situation. They need to be prepared to justify their pricing to both the regulators and public alike. At the same time, pricing actuaries will need to balance this against the business objectives of the insurer and, in the extreme case, the survivability of the insurer.
As to whether claims costs will rise (and hence insurers will have to reserve more) – Social inflation is the latest buzz term that is used to describe the increasing level of court awards due to changes in societal trend. No doubt, Covid-19 has had an impact on the wider perception of society as to what is fair and just with a sprinkling of deep pocket syndrome. Insurers may be under pressure to pay out more and perhaps beyond what they had expected in the current climate. Whether this will ultimately result in an increase in claims costs, either legitimately or otherwise, is unknown. There will be an element of crystal ball gazing required by underwriters and pricing actuaries when ascertaining future sociological trends and future risks to ensure adequate pricing.
There is a looming recession risk which may cause rates to start to drop and premium volumes to fall over the coming year. This will naturally affect the commercial pricing of insurance contracts.
- Is the financial substance of insurance companies jeopardized by Covid 19?
What measures do you think could be useful to keep the impact on the companies financials and solvency as low as possible?
We expect the immediate impact to be a decrease in insurer solvency and financial strength. Some of this will be driven by the fall in the value of balance sheet assets because of how the financial markets have reacted to coronavirus, however, the impact will depend on the investment portfolio of the insurers. It will be compounded by an increase in reserves held by insurers if they think their claims experience will deteriorate, but this does depend on the risk profiles of the business, taking account of expense structure (operational risk arising from key function and key person risks, outsourced/external functions, a general slowing down of the business (as things take longer to get done), office closures (rent is still likely to be due), staff sickness and potential reduced efficiency leading to increased costs), type of insurance product and investment strategies.
Insurers hold risk capital, and the way this is calculated has built in mechanisms to help avoid pro-cyclic behaviour; for example the equity symmetric adjustment in the standard formula. This means that the impact on insurance company financial strength is less than we might initially imagine. Where insurers use bespoke capital models, they should be considering the impact coronavirus will have, possibly amending their models or introducing validation tests to reflect more appropriate 1-in-200 events resulting from a severe spread of the coronavirus. We have seen capital injection calls in the London market for a couple of insurers. Assets will also be devalued although the US Fed and UK BoE have been injecting money into the economy to keep asset values high but insurers should prepare to deleverage their positions as appropriate.
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