KPMG: Do insurers have Covid-19 covered?

March 25 2020

What are the implications of Covid-19 for the insurance industry? And what longer-term trends might the outbreak drive?

By Erik Bleekrode

The Covid-19 outbreak that began in China has become a global pandemic. The number of fatalities is increasing, with hospitals and healthcare workers tested in ways never seen before. The impact on all our lives is profound. Governments are closing borders, imposing lockdowns, shutting schools, cancelling sports events and banning mass gatherings.

Alongside the tragic human toll, the pandemic is having considerable economic impacts, including stockmarket volatility, and is posing major challenges to global supply chains and for multiple sectors such as airlines, travel and leisure. Central banks have cut interest rates and expanded quantitative easing.

The crisis places a spotlight on insurers. They’re inundated with inquiries and claims across health, life and non-life lines. This is the moment of truth where insurers can be there for their customers when it matters most. Meanwhile, their own organisations and people are being deeply impacted.

Limited exposure for P&C insurers?
For non-life firms, the impact on claims will be relatively manageable. Most insurers learned from the SARS outbreak of 2003 and introduced exclusion clauses for communicable diseases and epidemics/pandemics into most non-life products such as business interruption and travel insurance.

Business interruption policies usually payout only if physical damage occurs to an organisation’s assets or operations – so Covid-19 related claims might not be covered, but there’s potential for future disputes.

Travel insurance may offer cover if a customer is diagnosed with the virus before or during their trip – but usually not for travel that is cancelled because of the pandemic, unless a customer has taken out premium ‘any cause’ cover, which very few have. Interest in ‘premium’ policies could change after Covid-19 passes.

Event cancellations will cause greater losses to insurers as some large events have policies that provide cover for epidemics or pandemics. The Tokyo Olympics, where analysts estimate approximately US$2 billion of coverage, has already been postponed to 2021, with reinsurers likely to bear the brunt of many associated costs.

Trade credit insurance which covers businesses against debts that cannot be paid by their customers or suppliers will also be impacted. This is a US$11 billion global market – and if increasing numbers of companies go out of business, claims could spiral.

“Alongside some big corporates in acutely affected sectors, many SMEs could be hit hard from supply chain disruption and a crunch in business levels”.

We could also see spikes in workers’ compensation claims with potential claims from workers saying they weren’t adequately protected by their employers against exposure to the virus brought about by their normal working duties. It’s impossible to predict how many claims will come, however, insurers offering this type of cover may need to brace themselves.

In addition, the volatility and falling interest rates within the financial markets will impact non-life insurers from an earnings and solvency perspective.

Mixed diagnosis for health insurers
The impact on health insurance will vary country by country. The number of cases and deaths could vary greatly, while coverage also varies. In the US and many Asian countries, much healthcare is privately provided, while in Europe and Canada, there is much higher public provision; all health systems are being tested to the limit.

We don’t yet know the short and long term treatment requirements, and therefore the cost for health insurers.

The crisis may also have some long-term (positive) effects on the sector. As pressure on health services rises, we should see a rise in telehealth service – which offer consultancy via phone or online video services. This could help healthcare reach more remote and less affluent populations including the under- or un-insured.

The pandemic may also see more people reconsider their health insurance needs. After SARS, there was a spike in critical illness policy sales in Asia, and a similar phenomenon post-Covid-19 could occur, with rising sales of health insurance, critical illness and life cover.

Market volatility creating difficulties for life insurers
Life insurers are facing the most difficult challenges in the sector. The market is closely monitoring the impacts of mortality and bearing the brunt from falling sales. They are also feeling significant impacts from uncertainty in the financial markets.

”As life insurers hold long-term assets and liabilities, market volatility is always challenging.”

In recent weeks, major exchanges have experienced some of their worst falls in decades. Movements in equities, interest rates and credit spreads create tremendous asset liability management risks for life insurers.

Globally, life insurers manage more than US$20 trillion in assets with around half estimated to be in government bonds. But the yields from these have fallen dramatically. The crisis also puts pressure on non-government bonds which may cause credit concerns and lead to an increase in bond downgrades.

In addition, central banks have been slashing interest rates. We were already in a low interest rate environment but now rates are heading down even further (and possibly below zero in some countries).

These factors can result in solvency ratio challenges. Prior to Covid-19, the market was seen as well-capitalised so insurers may be starting from a position of capital strength.

However, risk-based capital approaches vary widely by country which impacts how reactive the ratios are to market conditions. In many Asian countries ALM mismatches are larger due to the absence of appropriate long-term assets. This may exacerbate the issue. Insurers need to closely monitor solvency ratios in order to meet economic, regulatory and rating agency capital requirements, while regulators need to work closely with the industry to navigate this unprecedented situation.

The sector will be hoping that the pandemic blows itself out before long. Otherwise, if market volatility continues and fluctuations persist, firms may need to reassess their investment portfolios and exposures to potentially reduced investment earnings as well as protecting capital/security for policyholders and key stakeholders.

Be cautious about the cost-cutting response
This year will be difficult for many insurers given the predictions of the economists, some of which are saying that a “U” shaped or even a “W” shaped recovery pattern may be likelier than a “V” shaped pattern. Recessions are possible as = consumption levels will be dramatically impacted on a local level. This could impact the speed to recovery. Expectations vary on the long-term impacts; no one can be entirely sure.

While it’s tempting for insurers to suspend investment and cut costs, the crisis creates an incentive for the reverse action – to continue to invest in how to operate and create a more agile, digitally-enabled business.

First embrace flexible and remote working. The crisis provides the opportunity for insurers to test and ensure they have sufficient connectivity to their staff, agents, brokers, distribution partners and customers in flexible ways.

Management teams should rapidly assess operational areas with high concentrations of human capital support such as call-, claims- and shared service centers. Business disruption or resiliency plans are being tested and stressed. This is highlighted where there’s a lack of digital workflow tools, limited virtual or mobile work station capabilities or unscaled communication technology.

”The situation allows for a shift in the adoption rate of new ways of working, including the supporting technology, which may change how organisations are run post crisis.”

The crisis could also spur moving more systems and applications to the cloud – an area where insurers have lagged other sectors. With more people working remotely, having systems in the cloud offers greater bandwidth and capacity than if staff are accessing on-premise servers remotely. This could be the catalyst for change. Actuarial modelling software, for example, often sits on individuals’ computers. However, cloud services are offering enhanced security protocols allowing for a move sooner rather than later.

Insurers need to embark on digital transformation, to become more agile, responsive and connected enterprises. The Covid-19 crisis could propel more insurers into action.

These are extremely challenging times for individuals, families, businesses and indeed whole societies and economies. The insurance industry has a key role to play in supporting customers and societies through the crisis and the recovery.

Erik Bleekrode, Head of Insurance KPMG China and Asia Pacific