As insurance advisers know all too well, risks evolve over time, interconnecting and affecting one another. But some of these patterns have appeared at an unprecedented pace.
To get a sense of where the insurance markets are headed, we asked Richard Deakin (head of insurance sales, CoreLogic) and Len Elikhis (chief officer product, AIA) to speak about the insurance sector, as part of our Economic webinar series.
Here are my main takeaways from the session, but I welcome anyone interested to visit financialadvice.nz/bring-in-the-experts-webinar-series/ and watch the session – it provides great insights into both personal and general insurance.
What climate change means for general insurance
2020 was more than just COVID, social distancing and video-conferencing. From an insurance perspective, it was also the fifth costliest year since 1970, with global insured losses totalling NZ$125 billion.
These statistics were largely due to weather-related events (e.g. flooding in China, the UK and New Zealand, as well as the increasing number of hurricanes, tropical storms and bushfires occurring in the US), along with COVID-related event cancellation, travel disruption and business interruption.
The impact on reinsurance costs has been significant. As Richard Deakin pointed out, nearly 40% of premiums paid by consumers go to cover the cost of reinsurance, which is the ‘insurance of the risk assumed by the insurer.’ This makes climate change a global problem with local implications, as insured losses occurring around the globe affect premium rates locally.
What’s more, the direct impact of climate change on our territory is concerning. According to CoreLogic, the rise in water levels, combined with coastal erosion, more severe flooding and storm surge hazards, could put 120,000 New Zealand properties at risk over the next 80 years – and render them uninsurable.
This may lead to ‘insurance retreat’ in some areas of the country. Not only would covering high-risk properties not be sustainable from a business standpoint, but the higher costs of reinsurance would otherwise fall on to the rest of the customers, affecting affordability. Deakin added that in some situations, cover could still be provided, but with a higher excess or particular exclusions.
With home insurance being a mortgage requirement, we may see a spillover impact on property values in the coming years, as once-desirable coastal properties may become more of a headache and risk. This is something that advisers can help clients with, by making them aware of natural hazards and climate-related risks, and ensuring they are adequately protected (now and over time).
How COVID impacted the life and health insurance market
As part of our webinar session, Len Elikhis from AIA walked us through the current life and health insurance landscape, and how things have changed since COVID entered the equation.
The first thing to note is that new policies have been declining during 2020, compared to the previous two years. There are several explanations for this, one of which was insurers’ ability to offer new coverage during COVID-19. For example, the replacement income component was down by 31.7%.
With the initial confusion around underwriting rules dissipating, insurers have started to lift some of the restrictions that they had introduced last year. But uncertainty persists in some areas, particularly travel insurance and COVID-related exclusions. With vaccination rates progressing across the world, and borders slowly reopening, insurers will need to rethink their policies and risk profiles. According to Elikhis, the COVID vaccine would most likely be factored into certain underwriting decisions.
Back to health and life insurance, a decline in lapse and policy replacement rates may indicate that people are recognising the value of their cover and holding on to it. Advisers have been instrumental in ensuring that their clients are adequately protected.
During lockdown, timely and effective communication proved invaluable in building rapport with clients and helping them make more confident financial decisions. On this note, the new financial advice regime couldn’t have come at a more appropriate time: its renewed emphasis on client outcomes reinforces the importance of receiving expert guidance during confusing times. It’s about the individual clients, but it’s also about New Zealand’s financial wellbeing as a whole.
As for COVID-19 and our collective path forward, Elikhis noted, there may not be a definitive ‘exit’ event. We will most likely need to coexist with it by adapting our processes, economies and daily lives, and the vaccine roll-out is just the first stepping stone in our journey to ‘normalisation’. Meanwhile, COVID-19 will continue to impact the insurance industry, prompting people and businesses to reprioritise risk and resilience.
According to a global survey published by Aon in February 2021, prior to COVID, a pandemic was not a top-10 risk for 82% of businesses surveyed. Aon’s 2019 Global Risk Management Survey even ranked pandemic risk as 60 out of 69 identified risks.
We don’t know what the future holds. But what we do know, now that hindsight has set in, is that risk mitigation has assumed a whole new significance.