COVID-19 and the insurance industry

29 May, 2020

How does the insurance industry respond to the coronavirus crisis?

Insurance companies play a pivotal role during times of economic stress by helping households, communities and companies manage risks and cushion against losses. Yet, as one of the biggest groups of investors, they are also vulnerable to volatility in financial markets.

COVID-19 has highlighted the role of insurers and the importance of insurance. It has also highlighted challenges for the industry: policy coverage limitations, falling asset values affecting capital, changes to customer attitudes, and difficulties recruiting and retaining talent.

COVID-19 will have a severe and immediate impact on the scope and scale of claims, policy wordings, top-line growth, insurers' capital bases and their investment returns. To respond, insurers will need to move rapidly to a digital operating model, build in flexibility and agility, and find ways to maximise new income. What are the key considerations for insurance leaders in their organisations as they face the fast-moving variables of the crisis?

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Key areas for consideration

Crisis management

Communications both internal and external matter now more than ever. The ways your company responds to a stressful event can shape employee and public attitudes far into the future. It can be a defining moment for your corporate culture.

By contrast, you may face reputational or litigation risks if your firm is seen as neglecting policyholder concerns or dismissing employee concerns or safety.

Cybersecurity is a key part of crisis management, because there is additional vulnerability in the middle of a storm. There will be significantly higher levels of remote access to core systems, and employees and management could be more susceptible to social engineering efforts in the midst of a crisis.

Steps to consider

In this crisis, stakeholders already understand the basic facts. However, they also need to know what you're doing, and how your actions will affect them.

Insurance companies have business continuity plans, that's a given. Now that you need to invoke it, you'll want to confirm your emergency communications readiness, including outreach to employees, insured customers and other stakeholders.

  • Employees will look to you for guidance. Let them know how you're addressing their personal safety and how their jobs may change. Make sure everyone knows they have an obligation to stay "on message" and remind them about guidelines for contacts with the press and social media
  • Define how you'll stand up for customers. Look for ways to show compassionate, decisive value to insureds and society to bolster long-term loyalty and impact, particularly by demonstrating your speed, flexibility and technical expertise
  • Reach out to regulators to flag problems and risks, and proactively shape any regulatory guidance
  • Realistically, communication matters for all stakeholders now more than ever. This is also a good time to review the frequency and content of your presentations and updates to investors

You'll also want to look at ways to strengthen your cyber-protections because rising cyberattacks are aimed at exploiting this crisis. We recommend taking these steps immediately:

  • Conduct a phishing exercise now to reveal gaps in your defences
  • Strengthen your perimeter by using security tools to identify and deflect threats before bad actors can intrude
  • Strengthen your remote access management policy and procedures. Make sure working from home doesn't mean working without security. It's now possible to transition to rapid, secure, remote work models within days rather than months
  • Fortify your endpoint protection, and make sure devices and software are hardened and patched

Back to key areas for consideration

Workforce

There are a large number of considerations in relation to the workforce and the workplace that need to be taken into account as restrictions are relaxed and a return to work commences.

In your office environment, you may need to restrict access to some physical facilities, in whole or in part. Some employees may be challenged when asked to work elsewhere. You may find that some employees don't have appropriate physical environments for remote work, or that your supervision and review processes aren't adequate in those cases.

It is important to recognise that the current situation could be profoundly unsettling for many employees, some may be dealing with medical issues, childcare challenges, family income disruption and more. Depending on the length or severity of the outbreak, many of your workers may struggle to adapt.

Employees may face stress because of disruption to income, quarantines or illness among family or neighbours or both. Some workers may become less engaged or abandon their work responsibilities, reducing productivity and quality, and harming customer experiences.

In addition, your existing human resource processes may not be flexible enough for the new way of working, especially since processes and norms are still being established. Many long-standing expectations about everything from employee engagement to performance assessments could be inadequate.

Steps to consider

As your employees adapt to alternate work locations, you'll want to be flexible with work arrangements where you can.

  • Update your work-from-home policy if necessary
  • If your videoconferencing or other network technologies can't handle the load, explore technology solutions that can
  • Set up risk mitigation programs for employees who may still need to work on-site
  • Investigate the role that remote working can play in your business beyond the crisis
  • You should include efforts to measure the "pulse" or morale of the workforce
  • Communicate clearly and concisely with employees about steps you're taking to reduce stress while you move ahead
  • Your firm should review its plan for employee absenteeism, to be sure it's appropriate for the current environment
  • Adjust your business management policies to be sure they align with local regulations, such as entitlement to continued pay during quarantine, or covering costs of medical tests. You may want to consider providing expanded back-up child care services for employees. Consult with your risk management and legal teams about liability for newly remote employees
  • Refine performance expectations. There will be a learning curve as you adapt to a change in work locations and processes, and you should expect a dip in productivity. You may also want to refine goals and incentives, such as sales quotas, for your employees
  • Depending on your compensation planning cycle, consider delaying decision-making until the acute crisis has passed
  • Consider how you will supervise remote teams and employees. Some teams already may be able to collaborate while working independently, but others may need help

Back to key areas for consideration

Operations and supply chain

Physical supply chains are less significant for insurers than companies in other industries. But insurers depend on a wide range of third parties to deliver services, and their operations could be tested as the crisis wears on.

Third-party service providers are key to many insurers' operating plans, and so there are several considerations and risks to bear in mind as the current situation develops:

  • IT and other support services may deteriorate because of internal challenges or vendor problems
  • Some service suppliers may operate extensively in areas hit hard by COVID-19. If offshore, they may have limited or no ability to work remotely
  • Your firm may have limited insight into the ability of suppliers to execute. For example, outsourced claims handlers may have limited ability to access policyholder premises to conduct loss assessment for claims
  • Any business interruption among your suppliers, or their suppliers, could complicate your efforts to produce timely financial statements

Insurance companies could see spikes in service requests, regardless of their market segment or role in the distribution channel:

  • Claims will increase in some lines of business, especially for travel, business interruption and long-term care insurance. Even though specific losses may be excluded, some carriers could see a surge in claims involving health, travel, event cancellation, business interruption and supply chain policies. Governmental decisions may spur medical and employer liability claims
  • Web and phone traffic may surge, creating operational constraints or disruptions

Steps to consider

  • You'll want to make sure that you understand — and are comfortable with — the business continuity plans of your business partners
  • Determine if your suppliers have operations in areas hard hit by the virus. Review all suppliers, including those involved with information technology, outsourced customer contracts, premiums or claims processors (third- party administrators), payroll, fund accounting, custodians and third-party distributors
  • Review service-level agreements and key performance indicators with vulnerable suppliers and sub-suppliers
  • Ensure that whoever oversees vendors and third-party suppliers can avert or resolve supply chain disruptions
  • Investigate opportunities to "re-shore" outsourced processes, specifically looking at process automation or digitisation options or both

Prepare now for a rapid rise in operational volume.

  • Look for ways to avert technology glitches in high-volume activities, including customer service and policy loan requests
  • Determine whether your customer service team can operate remotely and whether you have plans to limit any disruption to customer service
  • Review plans for solving problems with systems and controls
  • Accelerate your digital agenda, and identify process automation opportunities

Back to key areas for consideration

Finance and liquidity

How you assess your financial condition: The COVID-19 crisis is already shifting the way insurers will need to think about the valuation of their investments and liabilities:

  • Valuation and price discovery may become a challenge because of market volatility and a possible decline in liquidity for certain products. You may face challenges in assessing the value of investments, hedges or insurance liabilities, particularly with distressed or forced-liquidation sales
  • As credit quality deteriorates throughout the economy, some insurers may need to address asset impairment and expected credit losses in their portfolios. In certain industries or geographies, for example, you may need to determine whether market events have triggered an impairment charge based on revised forecasts. Reinsurers, in particular, could face mounting losses that may increase credit risks on recoverables
  • Unfortunately, it will be the unexpected losses that are most troubling, not the expected ones. You may have hidden or latent exposures that you are not aware of or that you believe are excluded. The emerging legislative environment will be critical as will precedent-generating court decisions. Already there are contrasting messages from EIOPA and the New York State Department of Financial Services regarding retroactive COVID-19 coverage, for example
  • The regular cadence of loss recognition testing may be insufficient for the current environment. The assumptions you make about long-duration products may need to change. You may now have a different view on everything from long-term interest rates to mortality or morbidity than you had only a few months ago, and this could have implications on your Incurred But Not Reported (IBNR) reserves

How you provide for contingencies: Some companies may find that they need to shore up their reserves against potential losses from the COVID-19 crisis. Dividends generated by regulated subsidiaries may decline and are actively discouraged by regulators in any event. Subsidiaries, including captives, may need capital infusions.

How you report on your financial condition: Regulators have stepped up oversight and reporting requirements, including more detailed reporting on asset adequacy; reporting on direct and indirect exposures; consideration of stress-testing based on the pandemic; and consideration of the impact on solvency. You'll also be required to make disclosures about the impact of the virus on your business within financial statements. Such disclosures may include risk factors, impairment, debt, liquidity, and management discussion and analysis (MD&A) regarding operating results and changes in key asset or liabilities balances.

Steps to consider

  • You will want to reassess the reliability and validity of your company's valuation policies, models and controls to reflect the increased valuation risk or reduced price discovery in the new environment, particularly in light of ultra-low interest rates
  • In particular, you may want to watch out for "the new normal". There may be correlations you hadn't anticipated, downstream models might change if there is a loss-recognition event, you may need to reassess volatility given new market conditions, you may need to think about accounting for premium refunds, and so on
  • In general, you'll want to make sure that your loss recognition testing models include current market data and best-estimate assumptions.. Timing could be an issue, so you may need to pursue more robust "off-cycle" loss recognition testing. When considering recoverability of deferred acquisition costs, you may need to alter determinations of premium deficiency leading to impairment
  • Firms may need to make additional provisions for what could become adverse circumstances. For some, this will mean assessing whether the capacity for dividends from subsidiaries will fall. For others, this could mean updating hedging strategies and documentation, or revising trading limits and modifying "stress scenarios". This is normal, prudent planning. Knowing what you know now, you may want to revisit limits, regulatory capital buffers, the adequacy of stress scenarios and approval levels for large transactions
  • Evaluate your ability to update disclosures, even in volatile circumstances. Make sure you understand what is required regarding virus-related disclosures that are required by regulators, and then create a regular update process. Many companies may discover that their processes for monitoring and addressing changes to regulatory requirements are insufficient. You may need to make new disclosures about the business and risk factors, as well as management's discussion and analysis of results, liquidity and capital resources. For example, your existing disclosures may not adequately address your hedging programs, differences between GAAP and hedge targets, and whether changes in hedging strategy and hedge targets are warranted

Back to key areas for consideration

Tax, trade and regulation

Insurers have industry-specific tax reporting and compliance requirements. But the issues they'll face filing and paying taxes are likely similar to those faced by other industries. For example, subject-matter experts may be working at a distance, collaboration tools may not be wholly effective, processes may be undefined, and so on. In the short term, these are probably manageable, but few firms have tested anything like this at scale over a long period.

The disruption of global travel and typical ways of working creates immediate tax risks for insurance businesses which may go on for some time. Board meetings may not be taking place in their usual location. Equally key executives such as underwriters may be making decisions in locations which are not the norm.

Many of the actions needed to deal with the crisis give rise to potential tax costs or opportunities. Certain operations may need capital injections. Investments may need to be sold to fund excess claims generating taxable capital gains or losses. Similarly underwriting losses may drive insurers into an overall tax loss position giving rise to tax issues and opportunities.

Steps to consider

  • Update your operating procedures to deal with changes to normal work and location patterns - the location of board directors and key employees is a key driver of your tax profile
  • Make sure your tax function plays a central role and adds value in responding to the crisis. Is there an opportunity for capital injections to be structured tax efficiently as contingent convertible debt rather than share capital? Can deferred tax assets be recognised for losses on the Solvency II balance sheet and can credit be taken for LACDT? Can cash flow be maximised by optimising the use of losses and taking advantage of commitments by tax authorities to prioritise tax refunds
  • Some of the most useful actions here will come after the immediate crisis has passed. Your goal should be to build a staffing and operating model that can address the current crisis and adapt to potential future crises

Back to key areas for consideration

Strategy and brand

The insurance industry is, like other businesses, vulnerable to a slowdown in global economic growth.

  • Access to loans and capital markets may decline
  • Reduced access, or an increase in the cost of capital, may make obtaining capital difficult or expensive
  • Current dividend plans and buy-back programs may no longer be appropriate

In some cases, this may affect strategic development projects.

  • Some executed M&A and reinsurance agreements may be voided or modified, or closings may be delayed
  • You may feel pressure to postpone strategic initiatives or expansion plans such as IT and infrastructure upgrades

Steps to consider

Make sure you have a clear picture of your financial options.

  • Evaluate a range of scenarios for your firm's financial projections and capital needs, based on the situation as we know it
  • Review discretionary spending, non-essential projects, and both short- and mid-term liquidity plans. But you'll want to think broadly about all the levers in your control. For example, this is a good time to assess the effectiveness of volatility-responsive fund strategies
  • Review major business transactions to model various what-if or stress-test scenarios
  • Review communications to shareholders regarding buy-backs and dividends
  • While some long-term projects can safely be put on the shelf, don't automatically assume that this is the best approach. In some cases, companies are actually accelerating some key strategic initiatives because of how critical they are to the business, both over the short and long-run

Back to key areas for consideration


Other considerations

Beyond these pillars, each industry will need to address some subtleties of its own. Here, we highlight industry-specific considerations and offer guidance on how you might respond to the challenges.

Interest rates are lower, for longer. We've never seen global interest rates this low at this point in an economic cycle. ECB rates were already at historic lows and, now that Fed rates have dropped yet again, the industry is contending with even more margin pressure and ever greater imbalances between what it earns and what it may need to pay out. (As we write this, some rates are well over 100bps lower than they were last Autumn, when annual budgets were set.)

This may play out differently across the sector. Moving forward, this will almost certainly force companies to reconsider their operating models, as the existing approach will be hard to sustain with interest rates near zero. In some cases, we could see companies confronting difficult choices around divestitures or other permanent changes.

Claims will almost certainly rise. Companies that provide travel, short-term disability, business interruption and other specialty lines of insurance are likely to face mounting claims. Companies that sell such policies need to consider the worst possible outcome as part of detailed after-tax scenario planning. In almost every product category, there may be extended discussions about what's covered and what isn't. Insurers could find themselves balancing financial risk and reputational risk. At the same time, we note that risk management is an essential part of responding to a pandemic, and we are likely to see innovation to take advantage of new needs and delivery channels.

More exposure in some areas? The impact from COVID-19 may jar disability and long-term care insurance lines, altering anticipated loss ratios (ALR) or disabled life reserves (DLR). This event could also lead firms to take a broader look at portfolio hedging, beyond actuarial forecasts, to protect more fully against various exposure and exogenous shocks.

We may see more consistent regulation. Insurance regulators will probably coordinate and harmonize their approaches to COVID-19.

Many risks are related. Insurers have a unique challenge in addressing the pandemic, because the current environment could cause large losses across a variety of different business lines. Here's an example of this kind of 'cross-accumulations risk': an event that could cause a company to file business interruption claims, workers' compensation claims for employees who are sick or injured, general liability claims from customers who report that they've been harmed, accident and health claims, and even claims against directors and officers. As the first wave of suits is being filed, many companies are discovering that it is tough to track cross-accumulated exposures, which involve resources that may currently be in short supply.


The way forward

In a time of global uncertainty, it's easy to lose sight of the big picture. This is particularly true when the memories of the last recession are still relatively fresh. But it's worth recognizing just how different the current situation is from where we were a decade ago.

  • Our financial system is far more resilient
  • Our European (Solvency II) insurance system is more resilient
  • Many consumers are better prepared

This is why it makes sense to go back to first principles: what is your company's purpose? We encourage our clients to start by determining the few differentiating capabilities they need to thrive. Even in a crisis — especially in a crisis — you'll want to double down on the things that make your organisation unique and purpose-led. Eventually, this crisis may even present some opportunities for the industry to transform and excel.

Eventually, this crisis may present some opportunities for the industry to transform and succeed:

  • COVID-19 offers insurers a chance to build trust, brand and employee morale. Affirm to the public, policymakers and staff that the industry's core mission is to help manage risk and buffer against shocks
  • There may be a number of appealing M&A opportunities; record-low interest rates, market volatility or an economic downturn could prompt dealmaking
  • With person-to-person meetings now becoming less frequent, you may be able to speed up your firm's shift to direct channel, digital, contact with policyholders and prospects

Whether you're trying to protect business integrity, empower your people, make better or faster decisions, or transcend through technology, it helps to take a long view. Once this crisis passes — and it will — where do you want your business to be?

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John O'Leary

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8659

Darren O'Neill

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 7521

Ronan Mulligan

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 7505

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