Covid-19’s Impact on the Insurance Industry

  • INSIGHTS  |
  • 24/04/2020  |
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Covid-19’s Impact on the Insurance Industry

European insurance shares hit their lowest values over the past 3 ½ years, life and non-life companies face an increasing pressure. Though, the industry still plays a vital role in assisting customers and societies through the crisis and these hard times could even bring some opportunities.

The crisis sparked by the Covid-19 pandemic has had an unprecedented effect on every aspect of our lives in recent months, shaking up the stock market and posing huge challenges to sectors like air travel and leisure as well as to the global supply chain. Amid fears of a global recession, central banks have cut interest rates, sending yields plunging and European insurance shares falling to their lowest values in 3½ years, a situation which ratings agency Moody’s predicts will continue.

Despite the SARS outbreak of 2003 wiping $40 billion off world equity markets, many insurers have been slow to adopt exclusion clauses for epidemics/pandemics in preparation for the recurrence of a similar situation and now face vast numbers of claims. And though the market may be able to handle them, Moody’s does not exclude national governments requesting ex-gratia payments for customers or other forms of financial contribution to help ride out the emergency.

It’s a situation that places the solvency and profitability of life- and non-life insurance companies under increasing pressure. So exactly what impact is it having on the various sections of the industry and what might its longer-term implications be?

At a global level, Covid-19’s impact on life and health insurance is hard to determine with precision, as it varies by country and type of health coverage, but it seems probable that a combination of falling stock markets and increasing mortality will hit companies hard, with the consequent risk of many collapsing. While the sector may suffer in the short term, however, companies that weather the crisis may be well placed to see good future growth.

Life insurance companies too face challenges due to the reduced returns caused by interest rate cuts, but it seems likely that purchases of life insurance policies will grow, as will the number of people buying travel insurance, despite the drop in the number of policies the travel insurance sector is currently enduring.

As lockdowns continue, major events like the Olympics are being postponed, which will be punishing for larger insurance companies and means smaller firms specialising in event insurance and communicable disease cover may well find themselves out of business altogether. Reinsurers will also find themselves struggling as insurers claim back costs. On balance, though, companies with solid investments, sound reinsurance coverage and diversified business should weather the immediate crisis and stand good chances of prospering in the future.

Among the various bodies taking action to support the sector, IVASS – the Italian Institute for the Supervision of Insurance – has announced a series of initiatives aimed at assisting the country’s businesses during the pandemic, including postponing deadlines for home insurance, while the European Insurance and Occupational Pensions Authority EIOPA has also announced measures aimed at mitigating the pandemic’s impact on the sector.

The coronavirus is likely to have lasting effects on the global economy, and this may force companies in the insurance sector to produce better risk models and start offering protection against global pandemics and climate change. It will highlight the inadequate coverage provided by cheaper business policies and insurers will need to re-evaluate their business models and their core principles in order to come to terms with the shortfall. And one important legacy of the crisis may be that it obliges insurance companies to undertake the much-needed digital transformation of their organizations in order to make them more connected, responsive and agile.

One thing, though, is certain: the industry plays a vital role in assisting customers and societies through the crisis and the recovery which will follow it, and now more than ever should continue to invest in the needs of the future.

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