BCG – An FAQ for European insurers in the downturn

Executive summary :

Given the human toll that COVID-19 has already exacted in Europe and the risks that it still poses, insurers across the continent are thinking about actions they can take to safeguard their businesses. The pandemic is a threat to both the profitability and the capital position of all insurers. Primary insurers and reinsurers are in the same boat. They have to make some difficult decisions.

COVID-19 presents challenges for the future of insurers 

The tradeoffs are exemplified by those facing a European life insurer with which we are working. The insurer needs to shore up its regulatory capital, and it has been debating whether to derisk its balance sheet or raise new capital. Those aren’t the only options available, however, and we have pointed out some additional possibilities. The questions that the insurer is wrestling with, as it considers each new idea, revolve around opportunity costs and consequences.

The dilemma this insurer faces is not unique. In a contracting environment that requires fast market action, there is no such thing as holding onto everything—a company must give up something in order to achieve a more important economic goal.

Here are the key questions that European insurers are asking at this moment of uncertainty—and some answers.

Has the downturn for European insurers already begun?

It depends on the area of insurance you’re talking about and the region. If you’re a glass-half-full person, you can take some consolation in insurers’ relative performance. The insurance sector doesn’t face an existential threat, as aviation and tourism do. Most insurers have avoided the economic devastation that those industries have suffered.

And so far, the vastly higher claims that you might expect in a pandemic have not materialised. In fact, some insurers—such as those offering automobile coverage—have seen claims go down. (Fewer cars than usual are on the roads.) Other insurers—such as those focusing on life and health policies— haven’t seen a big impact yet.

Still, the writing is on the wall: there is trouble ahead.

What scenarios for the balance of this year are likely for European insurers?

Weak economic conditions will mean a decline in new business. Credit defaults will mount. Coface, the global credit insurer, predicts a 25% rise in bankruptcies. More bankruptcies mean trouble for insurers’ balance sheets; they also mean a decline in commercial business.

In addition, we have started to see the first wave of claims related to business continuity policies. For the most part, European regulators and European courts are siding with customers, not insurers, on the question of whether pandemic-related losses are covered under business continuity policies. This puts pressure on insurers to ease the burden on customers. In France, insurers have pledged $450 million to a solidarity fund for small businesses that have been hurt by the pandemic. In Italy, insurers must offer grace periods for premium payments. In the UK, the country’s financial watchdog is calling for insurers to be flexible in their treatment of customers.

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