6th August, 2020
With millions of people around the world already down with the Coronavirus, there is no mincing words saying that the virus has had an adverse effect on a lot of things.
Humans have died, industries have collapsed, and more negative things are still happening.
Beyond the crisis the virus has initiated in the health sector, its impact has reached many more sectors and that includes the insurance sector.
The virus has affected the insurance sector in multi-faceted ways, and unless all key stakeholders stand up to the call, worse might call in coming months.
From home insurance to auto insurance, several insurance companies have taken a hit.
In the finance industry globally, the insurance sector, given the nature of its business, stands to face a lot of risks due to the impact of the pandemic on operational policies. Of course, like most businesses, the first step that should be taken is to ensure that the health and safety of their employees are prioritized.
Then, deploying organizational operational measures to adapt to the crisis and ensure business continuity despite the malady.
However, it is important to note that in the coming weeks, things are most likely to change.
If the virus continues to spread its fangs for a few more months, significant operational and managerial adjustments would have to be made.
This would give a new look to the face of the insurance industry.
Although it is common knowledge that insurance companies, due to the nature of their business, are more resilient to economic mishaps due to the strength of their reserved capital and the prudential standards laid down for clients and stakeholders, many will be compelled to make grave adjustments in their business strategy, implementation of plans and control over cash expectations and investments to quell the effects of the pandemic.
Insurance companies are commonly called “custodians of risk” because, in times like this, companies and individuals rely on them to play the crucial role of managing risks, mitigating losses, and generally protecting the business and individuals aligned to them.
A global insurance leader, Neal Baumann, in his publication on Deloitte (March 25, 2020), stated some potential long-term impacts on the insurance company.
He went thus: “We expect the financial impact of coronavirus upon (re)insurers to be specific to the circumstances of each enterprise—the classes and mix of business they underwrite, their pricing and reserving, policy wordings, and reinsurance coverages.
• Falling equity markets and interest rates could put pressure on (re)insurers’ balance sheets, Life product profitability and investment management fees related to savings products.
• There will be some time-lag for insurance claims to be notified to insurers, assessed, and paid. Insurers have commenced the process of evaluating their claims reserves in light of the current circumstances and it is expected that this will be on-going as fact patterns emerge.
• (Re)insurers with well-diversified risk portfolios will be the most insulated from losses arising from coronavirus. Conversely, those with a high concentration of classes of the business most exposed to coronavirus could be adversely impacted.”
Globally, the insurance industry is expected to be ready for times of loss and damage, and that includes a pandemic, but the COVID-19 pandemic, would surely have a huge impact on it.
Baumann believes that stakeholders in the insurance industry at this time should ask certain questions.
Some of the questions he suggested were:
• What safeguards do we need to put in place and support for the safety of our people and distribution partners in the agent/broker community?
• How do we enable and sustain effective alternative work arrangements for employees? How do we ensure that we continuously improve virtual work-place productivity?
• How do we best bolster operational load implications concerning increased levels of customer enquiry and the increased level of support and counsel they may require?
• Does our existing cybersecurity armoury afford us sufficient protection under significantly increased load and new modes of working and exchanging information?
Almost every sector of the global economy will experience an impact of this in one way or the other, and the insurance sector is included.
The decline in the influx of activities would undermine the growth of insurance companies and most likely even bond insurable exposures.
Despite this reality, insurance companies need to stay informed, continue to be proactive, and make research on how they can better position themselves to challenges.
In the months following this outbreak, we do believe that level of risk-exposure that many businesses are currently facing will cause an increase in demand for more wide-ranging business insurance/business interruption cover.
Customers would expect that changes in insurance policies would take care of the many loopholes discovered during the pandemic.
Insurers will thus need to capitalize on the opportunities and up-level their investments in innovative products/services.
It is quite obvious that the speed at which the pandemic is impacting global economy is unprecedented.
Some Challenges Facing the Insurance Sector Due to Covid-19
The strain on investment portfolios
Generally, insurance companies thrive on their investment portfolios. The insurance market has been unsettled and as a result, insurers’ investment portfolios may be greatly impacted.
Furthermore, interest income revenue streams may quickly dry up as interest rates continue to drop.
There is a strain on cash flow because regulators are urging insurers to accept late premium payment with no penalties attached especially with auto insurance and home insurance. Insurance companies are still expected to perform their normal functions with almost no change or adaptation.
Decreased premium volume
Complete or partial closure of businesses, added to the need for social distancing, has led to a decrease in the demand for insurance.
There is a decline in payroll levels and this has led to a decline in payroll-based premium. And this will be on the negative end to the insurers because a decrease in the volume of premium means a decrease in income for the insurers.
In conclusion, the insurance sector needs to go back to the drawing board and come up with practical steps, implement needed plans and be ready to respond effectively and efficiently to surges on customer claims and inquiries.