The COVID-19 pandemic has brought unprecedented change to the way society operates. The trickle-down effect of a recession will have impacts on the insurance industry, its key stakeholders and customers. Specifically, COVID-19 will modify the operational process of assessing claims.
The new goals of insurance companies in response to the growing economic trend is to maintain solvency, adapt to new regulatory changes from government bodies and build operational resilience.
The pandemic has stunted economic growth with interest rates being weighed down while revealing increased credit risk in businesses. No industry has remained immune to this deadly virus. Insurance provides a form of protection against financial loss in adverse situations by providing immediate financial relief thus, mitigating risk. The actuarial science of policy development adopts statistics and probability to estimate the growth on future claims based on historical data. Insurance companies make profit through underwriting (selling of insurance products) and investment yields. Risk premiums range from a variety of aspects in life including but not limited to pet insurance, house insurance, credit insurance and all the way to life insurance.
The data is still evolving with COVID-19. This provides hurdles in how insurers will be required to price risk premiums and model the data. COVID-19 is challenging the current pricing assumptions and claims assessment. Some insurance products’ policy have changed due to COVID-19 such as landlord insurance. As the ongoing economic woe continues, landlords may be entitled to insurance payments, depending on insurance policy. However, tenants may fail to meet future payment obligations when JobKeeper/JobSeeker ceases. Pricing needs to adjust accordingly, which falls to the actuaries.
While the JobSeeker/JobKeeper payments are still active, income verification may not be pertinent in income protection insurance. Furthermore, claims assessment with regards to financial hardship has become more and more difficult.
How do you appropriately assess individual risk when the whole economy and its market participants have suffered similarly?
The AFR stated in an article that late payments from businesses have grown to 43 days compared to 22 days in pre-COVID times. Similarly, the portion of companies joining the growing list of voluntary administration has decreased. These are markers of expanding number of “zombie” companies manifesting from government social securities. Insurance cash collection cycles have increased drastically with late payments stretching to 53 days, more than 657 per cent from August 2019.
When a customer purchases an insurance premium, that revenue is used by the insurance company to make investments. Since there are no required start-up costs for an insurance product, it is relatively flexible for insurers to generate a cash flow from customers.
The current economic climate illustrates that interest yields are low with potential to go to zero or even negative! Life insurers rely on market returns, not only from bond markets but equity as well. In addition, capital requirements for insurers are rising and therefore insurers need to maintain larger reserves. This will affect the profit and loss statement (through the increased interest expense associated with debt capital) as well as the depleting underwriting profits. This domino effect is passed on to insurees through increased premium prices.
As can be expected travel insurance has taken a hit due to the pandemic travel restrictions. A mixture of increasing customer frustration, claim benefits and reduced cash flow has stunted this area of insurance. Due to lack of travel, there is a low demand for travel insurance products. In addition, the international travel industry will take time to be restored to its former glory. Domestic travel will take priority due to governments banning international travel and the decreasing household income. This means there will be a significantly reduced demand for international travel insurance products. Families/couples are more likely to travel domestically due to reduced budgets and consumer spending behaviour. Airlines and booking agents are reacting to this pandemic by providing generous cancellations provisions which may minimise the perceived need for travel insurance.
Interestingly, COVID-19 has generated a new wave of life insurance product purchasing. Customers have concerns of being selected against COVID-19 criteria i.e. whether or not they have the disease. Potential customers are concerned that COVID-19 will have inflated insurance premiums. The presumption: those who have tested positive for Covid-19 suspect they may be charged a premium when compared to their COVID-19 negative peers. This calls into question the customer compliance section in honesty as well the insurance section. Greater transparency is required, with some insurance companies outlining their products and what they cover during COVID-19 in a FAQ.
Insurance Product Trends
Trends from insurance claims show there are less claims being made on the claims being made on the patient side especially in regards to chronic diseases. This is due to the delayed diagnoses from the overall avoidance of hospitals and GP clinics. For example, melanoma diagnoses are down by 20% in Australia. People who are living with undiagnosed chronic conditions have the potential to swamp the insurance industry once restrictions are lifted. This necessitates, greater regulation for insurers (incl. solvency tests) to examine whether they will be able to handle the oncoming tsunami of claims.
Lockdown also provides some protection from accidents. Insurance products and benefits for individual accidents have fallen due to overall lifestyle changes imposed from government bodies. An individual is less likely to experience a car accident due to the lack of vehicles and people on the roads.
However, the decline in vehicle claims will likely be offset by the rise in mental health claims over the next months. This stems from the current uncertainty exhibited in people’s daily lives, particularly in Victoria.
The insurance industry has the opportunity to provide support in what is a very difficult and volatile period. Whether it is to change current policies to suit insurees in pandemics or to add a pandemic clause, there is opportunity for reputation enhancement. Insurance is there to save us in the “what if” moments, but does that include pandemics?
The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.