EDITORIAL: What impact has Covid-19 had on insurers?

Published in: Risk, Cat risk, Longevity - mortality, Conduct risk, Investment risk - strategy, Covid-19

At the start of 2020, I expected InsuranceERM’s coverage for the year to focus on a handful of topics: the review of Solvency II, the implementation of IFRS 17, and how insurers are addressing operational resilience, climate change and digitalisation. 

While those remain near the top of our agenda, we, like everyone else, have been swept into the whirlwind of Covid-19. So far we have published more than 100 stories on the pandemic, but for those of you not subscribing – or seeking a summary – here is our take on how the pandemic has affected insurers: 

  • By far the biggest initial impact was on investment portfolios. Bond spreads blew out, equity markets crashed and liquidity evaporated. Insurers are currently sitting on huge mark-to-market losses, and solvency ratios have been depressed. But that is not the major worry. Rather, we should be watching for the impact of bond downgrades and defaults (that’s what really hurts insurers) and the drop in interest rates (which means it’s harder to make low-risk returns).
  • The other immediate issue was operations. With staff working remotely, keeping up with a surge in customer and client demands – while maintaining information security – has been a huge challenge. Several European supervisors were pushing insurers to improve their operational resilience in the last year, and this may have been a saving grace for some firms.
  • Regulatory risk is rising. Some supervisors have urged – or even demanded – insurers halt dividends and limit executive pay as uncertainty around the pandemic persists. On the other hand, supervisors have relaxed some requirements and postponed initiatives that would have taken up managers’ time. The fair treatment of customers is under the microscope, and insurers have had to respond by relaxing some terms and conditions.
  • Surprisingly, the increase in mortality has not been a significant source of worry. Current death rates are within expectations for a severe pandemic. Thanks to modern science and healthcare, we are far from a repeat of the Spanish flu.
  • One strongly emerging risk is on reputation. Commercial policyholders are angry their business interruption cover is not paying out, and motor policyholders feel their premiums are lining the pockets of insurers. A wave of litigation on business interruption cover is arriving, while motor insurers are beginning to offer refunds and discounts.
  • Catastrophic levels of claims in travel, event cancellation, business interruption and trade credit insurance are emerging. But there are big questions about the extent of claims in other lines – D&O, employers’ liability and public liability, for example – and fear over how far pandemic-related claims will leak into other lines of business. The industry in now talking of losses in the tens of billions, possibly hundreds, but it will take a long time to play out. 
  • Business plans and targets for 2020 have been ripped up. Of course, forecasts for sales of travel and motor insurance have been cut. But the big threat is economic recession, which is bad news for insurers of every kind.
  • However, there is always opportunity amid the disruption. The brightest prospect for insurers is in plugging the coverage gap for pandemic risk, and the industry is mobilising to build partnerships with governments and design schemes that can combat this systemic risk.
  • Finally, one more positive note: the operational impacts of Covid-19 have led insurers to accelerate their digital transformation plans. Our sector was seen as lagging behind many others in the digital revolution; this pandemic will help close the gap.

I hope you keep reading and subscribing to InsuranceERM during this year and beyond - I wish you all good health.

Christopher Cundy