KPMG: COVID-19: the global insurance response
April 2020 featured report
This month’s featured report is one of a wealth of reports produced by KPMG into the impact of COVID-19 on the global insurance industry.
The section of their website on Coronavirus contains a massive amount of data, so we are focusing on a specific, short report that looks at the impact of the pandemic and the consequences of the future of insurance.
COVID-19 has proven to be – quite literally – a one in 100 year event, the like of which has not been experienced since the Spanish influenza pandemic of 1918 to 1919.
The KPMG report addresses a number of key themes:
- the response of the insurance industry;
- the impact upon agent networks;
- the impact on non life business;
- just who is responsible for business interruption cover; and
- the uncertain future life and healthcare cover in the future.
Speed of response
The response of insurers across different regions varied greatly and seems to have been largely influenced by the severity of the crisis in that particular country.
Asian insurers responded rapidly to the unfolding situation, while Europe and North America seemed slower to act. It may be that mobilising their operations to determine what business as usual might look like in the future simply took longer because they thought they would have more time to plan. But the speed of contagion was the biggest shock and disruptive event, forcing insurance companies to deploy resources remotely, while dealing with a huge volume of claims.
Insurers in the hardest-hit countries responded more rapidly than others. China and Italy were both particularly badly hit in the early stages of the pandemic.
In China, the authorities moved quickly to ensure treatment was offered swiftly, while coverage was extended to cover hospitalisation or death caused by COVID-19. In one case, a pre-compensation programme for existing policies was arranged, and 10 million free policies worth RMB 1 trillion, or about US$10,000 per policy, were made available to an insurer’s agent network.
Rapid claim settlement was arranged to prevent delays for life policyholders, while healthcare coverage was extended across healthcare workers and reporters working in Hubei province.
In many other markets, the public health system covers most requirements, so there was less need to step in. However, policies designed to protect policyholders from the COVID-19 risk were offered to policyholders as extensions or standalone products.
While many governments have stepped in to secure the short term income of many of its citizens, some insurers were keen to show their commitment to – and involvement in – their local communities.
There were examples of insurers offering coverage to companies’ employees, whether or not health insurance was already in place.
Some even donated medical supplies to overseas healthcare systems.
The impact on agents
Markets with extensive agency networks heavily rely on face to face interaction with consumers.
However, during the pandemic, it was impossible to conduct business. One insurer made 10 million free policies available to its network allow them to effectively sell them to their clients.
This will undoubtedly accelerate the move towards increased digitalisation of the agency network, not to replace agents, but allow them to do more – and better quality – business.
Non-life under threat
Non-life business will face considerable difficulties, says the report. If the pandemic leads to widespread recession, renewals of commercial insurance will fall.
And while SME business has been growing fast in recent years not only in developed nations but also China, it is likely to be one of the first costs to be cut.
That said, the direct impact from COVID-19 has been limited, due to the limited scope for claims from business interruption and travel insurance policies.
Of course, the future for travel premiums looks bleak with international travel all but closed for the foreseeable future. But the furore surrounding business interruption has yet to be fully played out.
Regulators and governments around the world are examining the potential to encourage – or legislate to compel – the insurance industry to settle more claims.
A number of states in the US have proposed legislation to require insurance companies to provide business interruption insurance coverage to cover COVID-19 related claims.
As of the end of April, UK’s the Financial Conduct Authority was concerned that some insurers were dragging their feet over setting claims with businesses that had sufficient cover for COVID-19.
However, European insurance regulators have recognised the potential danger to the insurance industry and have taken steps to mitigate the risks posed by COVID-19.
The European Insurance and Occupational Pensions Authority (EIOPA) has proposed relaxations to Solvency II reporting have been implemented in Germany and France and potentially soon in Spain.
Life, but not as we know it
While life remains well-capitalised – and the regulators in Europe are keen to see it remain so – it is a product line that has been heavily squeezed in recent years.
The investments underpinning these product lines face further stress, with government bonds remaining volatile while already yielding little or nothing.
Any impact on the global economy will compound the losses in investment portfolios and require insurers to tie up capital that might otherwise be used to protect their businesses.
This will likely result in some consolidation. Germany has hundreds of life insurance companies already challenged by low interest rates. While there have been calls for a nationwide approach to reinsurance, small and medium sized companies are likely to be picked off.
M&A activity is also likely to be slow as businesses retain capital for survival, in favour of future growth.
Much remains unknown
The KPMG report makes a good point in that what happens in the future has not yet been determined.
The level of change will be influenced by the amount of interdependence between consumers, sales channels and regulators.
Yet, one thing is absolutely certain. Digitalisation will no longer be viewed as a ambitious target, but an essential goal and pushed up the corporate agenda.
The experience of seeing peers with more advanced digitalisation projects being able to act with greater agility will spur on those who are currently lagging behind.
Some corporate savings may come from a new assessment of real estate, says the report. As remote working has not only proved successful, but may be required for the foreseeable future, insurers may move to more flexible working and do away with large corporate offices.
Savings on real estate will mean there is more capital and capital makes for a more resilient business.
Business continuity planning will become more important, not only for management, but regulators, some of whom have held concerns for some time.
The impact of COVID-19 will also cause many to reevaluate the role of insurance within society.
This may lead to a refocus on how best “to mitigate major structural and societal risks”, as KPMG puts it.
This point was raised by the interviewees in last month’s TDI China in Focus Q&A. There is no doubt that society will continue to need insurance, but, asks the report, are there certain things that cannot be priced by insurance alone?
This debate has been raging in different countries around natural disasters – China with regard to earthquakes, in the US, Texas and the floods, while the UK’s own experience of flooding has shown these are no longer one in 100 year events.
Whether a pandemic is priceable will be at the heart of the debate, says KPMG, but it is convinced that the insurance industry will continue to be innovative and responsive.
This was seen by how, thorough discussion and tailoring limits, cyber insurance went from being unaffordable to indispensable.
Ultimately, clients will decide whether the price is right for them.
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