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?
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.
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.
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:
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.
As your employees adapt to alternate work locations, you'll want to be flexible with work arrangements where you can.
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:
Insurance companies could see spikes in service requests, regardless of their market segment or role in the distribution channel:
Prepare now for a rapid rise in operational volume.
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:
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.
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.
The insurance industry is, like other businesses, vulnerable to a slowdown in global economic growth.
In some cases, this may affect strategic development projects.
Make sure you have a clear picture of your financial options.
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.
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.
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:
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?