We are into month 3 of the COVID-19 pandemic; an unprecedented threat to the global public health, but also to wider economic and political stability. The interconnectivity of risks demonstrates how, on a global scale, an adverse impact on one industry has an immediate knock-on effect on others. We have all been witness to the steep market shifts which, for the better or worse, will shape the forces that cause significant change across multiple industries and geographies.
In the short term, COVID-19 will pose questions for the very survival of businesses - in particular corporates - which will in turn create questions for their insurers. Affected businesses will be carefully checking their insurance policies for opportunities to mitigate any downturn, and many businesses are likely to seek claims.
Insurers’ exposure will come down to scrutinising the policy wording. Moreover, in the short term many individuals who previously took little interest in non-mandatory types of insurance will re-assess their stance towards it, its necessity, and what insurance is really there for.
Insurers will need to respond to short term customer behavioural shifts, but also ensure that in the longer term they are better equipped to respond to events of this severity.
At the unprecedented pace at which the virus has been spreading, many companies are facing staff shortages, leading to a temporary or prolonged inability to provide their products or services to the end customer. This disruption has resulted in a large numbers of claims relating to business interruption reported in the London Market alone, with many businesses carefully revisiting their contractual rights, focusing on areas such as force majeure and business continuity.
Whilst we do not know just yet what the potential outcomes may be, the process of review is in place and is likely to create pressure for insurers.
Many governments have taken measures against public gatherings, including social and sporting events, amongst others. Depending on specific contracts, policies which include cover such as cancellation/contingency will provide for financial loss due to risks beyond the control of the insured whereby an event can be postponed or cancelled. Typically, financial cover is provided for financial loss for ticket refunds or lost revenue, however, the insured is required to take mitigating actions by re-scheduling the event or changing venue, for example. Many contracts have an ‘epidemic’ or ‘communicable disease’ exclusion, although sometimes these are covered by an extension to the policy. The key to triggering cover will be that a pandemic, such as COVID-19, is undeniably beyond the control of the insured, however, this will still be subject to individual contracts and any special endorsements or extensions.
Estimates for the UK population are that up to 20% of the UK workforce will be off work as a result of the pandemic. If this becomes the case, it will lead to severe disruption and will have noticeable professional liability implications. Absence of key people poses risk concerns and may lead to the increased likelihood of errors when certain operations are undertaken by staff with no previous knowledge or authority.
Traditional business interruption is typically connected to physical damage. Many business interruption policies cover for business interruption or disruption as a result of a compulsory closure by public bodies in the event of a notifiable disease. Given that COVID-19 is now a notifiable disease, the policy wording will determine if such claims will cover any third parties.
While we have all been watching the impact on stock markets, insurers will be examining claims from the insured stemming from the declining values in particular asset classes, with the risk being that financial professionals may not price funds accurately or manage to divest problematic investments in time.
Asset managers will need to closely monitor the economic and geopolitical effects of the pandemic, taking the necessary steps to protect client investments. Claims against asset managers or their senior management can be anticipated either from clients, shareholders, investors, or even the regulator. The FCA has issued their statement expecting firms to have contingency plans in place and to take all measures to comply with their obligations. Insurers are facing the risk of a negative impact on their capital strength due to market volatility, so this is clearly a priority focus area over the coming months.
Scenarios which were previously deemed as extremely unlikely will no longer be considered as such, and customers will begin to seek policies that protect them against pandemics or other natural disasters, including the impact of climate change. Historically, the premiums on policies covering infectious diseases have been very high and both businesses and individuals were not willing to pay the price. With demand increasing, the market has come to realise the need to develop products that cover just that. Munich Re is already encouraging insurance businesses to focus on that market segment creating new and differentiated premium opportunities.
Global economic indicators are showing a slowdown which is unlikely to improve in the short term. This will create an opportunity for insurers to review their business model and to consider new ways of creating profitable business. Racing to the bottom with squeezing premiums and margins will not be enough. It is also possible that regulators could consider the introduction of new capital reserve rules which could see Insurers entering a new race to increase their capital reserves necessitating the introduction of new products, new offerings and perhaps opening up the insurance borders to other industries and verticals to encourage ‘cross-pollination’ and collaboration.
Insurers who offer holistic and proactive customer engagement will manage the crisis better and retain their customer base. This could include the following:
A good example of how technology can play a vital role in times of crisis has been demonstrated by Ping An Insurance in China. With their technology expertise they have been able to support other banks and insurers by providing their customers, employees and agents with the capability to work online even from the early days of the outbreak.
There is a large number of Insurtechs who can help Insurers looking to build resilience for future pandemics and other such extreme scenarios (e.g. climate change). Parametric insurance providers have existed for some time and Insurtechs can help companies improve access to their data and develop high impact AI and data solutions. One such example, is Metabiota – a large database which covers historic and emerging outbreaks. These are used to create models which apply sociopolitical and environmental data to epidemiological data. Those models are then reused by insurers to underwrite associated policies in a way that makes sense to actuaries, underwriters and end customers. Such models have been tested for the first time during the outbreak and are under careful consideration by insurers.
The current outbreak is unprecedented in recent times and a big test to how the world conducts business. Once over the hurdle, undoubtedly businesses will rethink contingency plan, more flexible and virtual working, increased supply chain diversity and improved financial stability.
Insurance will be no exception to this, as policies will be revisited, actuaries will factor in more extreme variables and perhaps even see insurers work together to develop quicker and systemic responses.
One is almost certain, not too dissimilar to how the business world and especially financial markets changed following the financial crisis in 2008, we should expect similar learnings from the COVID-19 outbreak to inform business structures and ways of working going forward.