COVID19 has caused a lot of disturbance for insurance firms, not least as they are in the industry of various pricing risks. The pandemic was considered a low-probability occurrence. But the economic effects of this crisis can act as a catalyst for favorable and positive changes in the industry.
According to the Internet (specifically Google Trends), the search term “uncertainty” rose more compared to threefold between the end of 2019 and the middle of 2020. It is not surprising, since 2020 has unmasked uncertainties and risks that few people, as well as organizations, considered at the beginning of the year.
We will discuss how insurance firms, as organizations tasked with managing and quantifying risks, have c to some of the issues of 2020. The industry has not been immune to the consequence and is more likely to see economic impacts, as well as repercussions as the pandemic continues to unfold.
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How can Corona Virus Disease-19 risks be priced?
The root premise of insurance is the transfer of risk. Policyholders or individuals swap a possible significant and unknown outgoing for typically smaller and known premiums paid by firms. The firm then pools the risks together and seeks to forecast, manage, as well as payout claims.
The different aspects of the Corona Virus Disease-19 have meant that its effect on people’s lines of business where there’s coverage is pretty significant. The affected sectors include business interruption (for instance, disruption to help supply chains, as well as inability to operate normally because of government measures), travel, event cancellation, cyber liability (because of increased individuals working from the comfort of their homes), and trade credit insurance (it covers ventures if clients who owe money for services or products delay payment or don’t pay at all).
For instance, consider Wimbledon, considered as the world’s oldest tennis competition held in London, England, every June. The COVID-19 pandemic safety coverage for this event is expected to result in at least £114 million payments because of the cancellation of the tournament last year.
A more severe example of payments because of event disruption is Tokyo Olympic postponement, with most analysts estimating the insured cost of the event at two billion dollars. While a lot of insurers have priced and considered risk into their security risk, the global effects of this disease have led to most risk commentators describing it as an unpredictable event. In short, an event that lies outside the field of regular expectations.
Pricing a pretty low probability of unexpected occurrence is very difficult, as the lack of historical information impedes the modeling of ensuing risk events happening. With few pandemics in the last couple of decades, risks fall into this category. With that in mind, it is pretty evident that the pricing of these risks within policies has not been understood as well as allowed for.
How will the pandemic affect the industry?
Longevity and mortality
A prominent and immediate implication of the disease for the life insurance industry is that the tragic human toll affects annuity and life insurance coverage. Corona Virus Disease has resulted in a lot of premature deaths, which has increased the death-risk liabilities for most life safety products.
But people should remember that the extent of this effect depends on the age profile of policyholders, as well as where they live. Not only that, firms usually provide safety against the longevity risk through the life-contingent annuity solutions. That is why there may be a lowering in the presumed longevity risk of annuities from a pandemic-related death.
These longevity and mortality risks counterbalance each other, to some degree, by acting as natural hedges. Hence, the change in pandemic-related death liability will vary significantly between insurers depending on balances of product mixes that the agency has underwritten.
Regulation
Different regulatory regimes, like the Solvency 2 directive from the European Union, require that firms need to manage their solvency requirements together with their risk profiles. That is why there may be conversations with regulatory supervisors underway, especially when it comes to assumptions around the solvency capital requirement.
Financial implications
Markets have experienced a lot of changes and volatilities since they started reacting heavily to Corona Virus Disease in 2020. AS companies hold most assets to cover their liabilities, significant changes in financial markets may have different implications.
For instance, although equity markets have recovered from tons of drop they experienced early last year, future decreases in equity values, as well as volatility remain a considerable threat to solvency ratios. Not only that, lower interest rates have consequences for companies, as they are pretty sensitive to long-term IRs.
The net effect on the balance sheet will depend on asset durations compared to liability durations. Firms usually have liabilities that are much longer in duration compared to the assets available today. Hence the net impact of long-term reductions in IRs on balance sheets is most likely to be negative.
How will the Corona Virus Disease-19 general and health insurance?
Firms underwrite death risk; that is why there were a lot of concerns that they would experience huge payouts from an increase in treatments and hospitalizations related to the pandemic. According to the evidence, the pandemic impacts on health insurance firms have been a lot smaller compared to what is expected.
They assigned this to the fact that a lot of diagnosed people have been able to self-isolate at the comfort of their homes instead of staying in the hospital. Not only that, there has been a considerable decline in claims not related to COVID-19, which offsets the expected consequences of pandemic-related claims. General insurance has also been hit in different ways by Corona Virus Disease.
For instance, travel has been significantly disrupted, affecting a lot of travel policies. Vehicle claims have been affected as different lockdown measures have greatly resulted in unprecedented dips in a lot of road users, leading to a sudden fall in the number of claims from motor accidents. Theft claims have also dipped significantly as both vehicle owners and vehicles have remained at home.
