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The Covid-19 outbreak that started in China late last year has turned into a global pandemic. Although it now appears to be slowing down in China, the spread of the disease is accelerating elsewhere, and the World Health Organization recently described Europe as its current "epicenter." Governments are interacting in more exciting ways than ever, with border closures, travel closures and restrictions, schools and universities closed, and mass gatherings such as prohibited sporting events.

It is not possible to know how the crisis will develop from here. But in addition to the tragic human cost, it already has significant economic impacts, poses major challenges to the global supply chain and certain business sectors such as airlines, travel and entertainment, and causes huge swings in the stock market and some rapid drops. Central banks, including the US Federal Reserve and the European Central Bank (ECB), have responded by cutting interest rates. The European Central Bank has expanded its quantitative easing program to provide more liquidity, and the Federal Reserve may do the same after the United States joins other countries in declaring a "national emergency."

A crisis like Covid-19 affects all business sectors, but particularly highlights insurers who can expect to be overwhelmed by public inquiries and claims on multiple different lines, be it health, life or non-life coverage. Balancing the need to respond to this influx of call center activity with a distant and rapidly changing workforce is an area that insurance companies are trying to address. Of course, countries are at different stages of coronavirus activity.

So how is the insurance industry likely to take shape in the current crisis? What are the implications for the different industrial sectors? And what are the long-term trends that the future outbreak can serve?

Limited exposure to general insurance companies?

Starting with non-life or general insurance first, I expect the impact on claims to be relatively manageable. Most insurance companies learned lessons from the 2003 SARS outbreak and introduced exclusion clauses for infectious diseases and epidemics / epidemics in most non-life products, such as business interruptions and travel insurance.

Business interruption policies generally only pay in the event of physical damage to an organization's assets or operations, so claims related to the Coronavirus may not be covered, but there is the possibility of future disputes on the matter. Meanwhile, travel insurance may offer coverage if a customer is diagnosed with the virus before or during their trip, but not for trips canceled due to the pandemic, unless the customer has received premium coverage for 'any reason' ', which is a small number. Too much to have. Of course, interest in "premium" policies may change in a post-COVID-19 world.

Cancellation of events can cause even greater losses for insurers because some (but certainly not all) large events have policies that can cover them even in the event of epidemics or epidemics. The biggest event this year is the Tokyo Olympics, and analysts estimate coverage close to $ 2 billion.

The reinsurance industry is likely to bear part of the burden here, as insurance companies claim coverage costs back to a certain cap. For example, it was reported that one of the world's leading reinsurers would have been exposed to more than 500 million euros if all events covered by epidemics were canceled.

However, there are two big potential areas to pay attention to besides life. First, commercial credit insurance, which covers companies against debts that customers or suppliers cannot pay. This is an $ 11 billion global market, and if more and more companies go out of business due to the effects of the coronavirus, insurers could face rapidly escalating claims. There is a particular concern that, along with some large companies in the worst hit sectors, SMEs in various markets could be severely affected by supply chain disruption and a crisis at business levels. The cost of this can largely depend on the severity of the pandemic, how long containment measures affect different types of businesses, and how long they last.

The second area is workers' compensation claims. We could have seen spikes in the number of workers who claim not to be adequately protected by their employers from exposure to the virus caused by normal job duties. It is impossible at this time to know how important such statements are. But insurance companies that offer this type of coverage to employers may need to prepare, depending on how things play out.

Finally, volatility and low interest rates in financial markets are likely to affect general insurance companies in terms of earnings and solvency. The impact is likely to be greater for life insurers and is therefore discussed in more detail below.

Mixed diagnostics for health insurance companies

It is difficult to quantify the impact on health insurance globally because the impacts will be very different from country to country. This is because the number of actual cases and deaths can vary greatly between countries / regions and because of the diverse composition of health coverage itself. In some countries, such as the United States, for example, most health care is provided privately (except for the elderly, where Medicare plays an important role), while in other countries, such as Europe and Canada, there is much greater public savings. In Asia, national health systems are often immature and there is a lot of private coverage.

Currently, the main problem in most countries is enabling rapid testing of people, particularly people from vulnerable populations such as the elderly or those with underlying health problems, especially weakened immune systems. In most countries, this test is free (provided by governments) or costs are waived by healthcare providers and / or health insurance companies. However, free treatment is not comprehensive and these costs can be significant.

So far, we simply don't know what the ongoing treatment requirements are and the eventual rates of death or coronavirus illness, and thus what cost health insurance companies can bear.

However, I believe that the crisis may have a number of long-term (positive) impacts on the sector. First, with increasing pressure on healthcare services due to large numbers of patients, we are likely to see an increase in telehealth services as we provide patient counseling over the phone or online video services. This can have long-term constructive effects, helping healthcare to reach remote and less affluent populations, including the uninsured or uninsured. Making health care more available and accessible means that, to a small extent, communities can benefit from the lessons and actions taken during COVID-19.

Second, the pandemic itself may cause more people to reconsider their individual health insurance needs. In the wake of the SARS epidemic, for example, we saw a temporary increase in critical illness policy sales in Asia. We may see a similar phenomenon after the coronavirus, with sales of health insurance, critical illness and even life coverage on the rise around the world. 

Market volatility creates more difficulties for life and retirement insurance companies

Of all insurance sectors, it is life insurance companies that face the toughest challenges. The industry is closely watching the potential impacts on death rates, however we expect life insurance companies to feel the significant impacts as well due to what is happening in the financial markets.

Given the long-term assets and liabilities that life insurers have, market volatility has always been a challenge for the sector, and we have seen extreme volatility in recent weeks. Major stock exchanges around the world have seen some of the worst declines in decades, even if the floor clears again later. Movements in stocks, interest rates, and credit spreads create enormous asset and liability management risks for life insurers as yield curves flatten.

Globally, life insurers manage more than $ 20 trillion in assets and up to half of them are in government bonds. But the yields on these have fallen sharply: Yields on US 10-year bonds have more than halved since late 2019, for example. The crisis also puts pressure on non-government bonds that can lead to credit problems and can lead to further downgrades of bonds.

Also, as mentioned above, central banks have lowered interest rates. We were already in a low interest rate environment, which was always difficult for insurers in general, but especially for life insurers, prices are now falling further (possibly below zero in some countries). Older companies or products that are highly sensitive to market variables, such as fixed and variable annuities, long-term care insurance, and comprehensive life insurance, are likely to feel the effects more deeply.

All of these factors can create challenges in the solvency ratio. Before COVID-19, there was a lot of talk about the industry with good capital, so insurers can start from a position of strength in terms of capital. However, risk-based capital approaches vary widely by country, affecting the extent to which the indices interact with current market conditions. For example, the Solvency 2 system in the European Union is highly sensitive to fluctuations in the financial market and movements in bond yields and credit spreads. Other capital approaches may be sensitive to bond downgrades. As a result, insurers will need to closely monitor solvency ratios to meet economic, regulatory and capital rating requirements.

The sector expects the epidemic to spread soon. Otherwise, if market volatility continues and volatility continues, they may need to reassess their portfolios and their risk of exposure to declining investment earnings, as well as protect the capital / safety of policyholders and stakeholders. key.

Be careful with the cost reduction answer

It is clear that this year may be a difficult year for many insurers due to the expectations of economists, with some saying that a "U" or even "W" recovery pattern may be more likely now (rather than a " V "). . All over the world, questions are beginning to emerge about potential recessions. why? We have seen such uneven efforts to contain viruses that they greatly affect consumption levels locally and therefore affect the speed of recovery. Expectations of long-term impacts vary; No one can be completely sure.

While it is tempting for insurers to suspend investment and cut costs in such a challenging financial year, I believe the crisis creates an incentive for them to do the opposite: continue to invest in how they operate and create more resilient and digitally enabled businesses. In other words, insurance companies now more than ever must keep investing in their minds to be prepared for the future.

By this I mean, first of all, to adopt flexible and remote work that will be necessary in all sectors due to the virus, including insurance. The crisis offers insurers the opportunity to test and ensure that their businesses have enough connectivity to help more employees who work off-site and flexibly, now and in the future.

What this day means is that management teams must quickly assess operational areas with high concentrations of human capital support such as call centers, claims, shared service centers, etc. to determine the impact. Flexibility or business interruption plans are tested, emphasized, and in some cases derived. This is especially true in regions where there is a lack of digital workflow tools, limited mobile or virtual workstation capabilities, or unclassified communications technology. These traditional methods are often used to complete medium to more complex processing activities that require a team approach to problem solving. This position enables a major shift in the rate of adoption of new forms of work, including assistive technology, which can change the way organizations are managed after a crisis.

When it comes to technology, the crisis could also be a catalyst to consider moving more systems and applications to the cloud, an area where insurers have lagged behind other sectors. And with more people working remotely, having systems in the cloud provides much more bandwidth and capacity than if employees were accessing servers within a company remotely. This is an opportunity for the insurance industry and could be the catalyst for this move. Actuarial modeling software, for example, is often found on individual computers, where security issues are observed when placing it in the cloud. But with today's cloud services introducing improved security protocols, it may be time for more industries to take this step.

On a larger scale, insurance companies, like other industries, must embark on the digital transformation of their organizations to become more flexible, responsive and connected institutions. Perhaps one of the legacies of the coronavirus crisis is that it is pressuring more insurance companies to do so.

These are very difficult times for individuals, families, businesses, and even entire societies and economies. The insurance industry plays an important role in supporting clients and communities during crisis and recovery.