As a general rule, insurers rely on investment income as a key part of their revenue stream. Unfortunately, that’s been hit hard by the broader economic impact of the COVID-19 pandemic, leaving insurers in a vulnerable position.
Cashflow and liquidity needs are a vital focus area for insurers, with some already having looked to de-risk their investment portfolios. In the view of Grant Peters (pictured), Ernst & Young’s Asia-Pacific and Oceania Insurance Leader, insurers should also be examining capital management.
“The question there is really, with an extended economic downturn on the cards, what level of new business can insurers and brokers expect?” Peters said. “With higher levels of unemployment and underemployment, as well as just general affordability issues, it’s likely we’ll see a lower volume of new business sales and also potentially a drop from existing customers who can’t afford to continue at the level of cover they had before.”
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As such, he believes insurers can expect downward pressure on premiums and customer volumes, as well as broker commissions, in the current environment. On the other side of the equation, however, is what the pandemic and resulting economic crisis could mean for future insurance claims – something that remains very uncertain.
“We’ll probably have a clearer picture as we head into 2021, once some of the economic stimulus from the government eases off and we start to get a better sense of things like where the longer-term unemployment rates might be,” he continued. “But, at the moment, it’s very hard to estimate what the impact on claims across various product lines is likely to be over the coming year as it will partly depend on the extent, shape and timing of the broader economic recovery.”
In terms of general claims volumes, Peter says it depends on the specific product lines.
“Some of the personal lines, such as home and motor insurance, for example, have actually seen a lower number of claims through the pandemic period as more people are staying home and driving less. As we move out of lockdown and return to normal, those types of claims can be expected to start to return to their usual levels,” he explained.
“In some overseas jurisdictions, we are starting to see a bit of conjecture regarding business continuity insurance. But we haven’t seen this type of pressure in Australia at this stage, and there are different in-policy terms and conditions in different markets.”
In the UK and US in particular, there’s been “some public pressure” on some of the big insurers around what levels of claims they should be paying out.
“That will probably take a few months to play out and there are some philosophical questions that need to be addressed in those markets about the real role of insurance,” Peters said. “Ultimately, if more claims are paid it means that policyholders will end up paying higher premium rates for those types of policies in the future or, worst case, some of those policies might be pulled from the market altogether if they’re no longer sustainable.”