Insecure and uncertain in insurance business as Covid-18 damage claims mount

Insurance companies around the world were sailing smoothly, helped by growth in emerging markets and strong capitalisation. Things changed in late February when markets realised that Covid-19’s impact on insurers could be significant. Insurers are yet to know the full impact of the crisis as governments and regulators nudge them to give moratoriums to policyholders and quickly settle claims too. India’s insurance regulator has set strict deadlines for medical insurers to settle Covid-19 claims. General insurers face damage claims from businesses devastated by the national lockdown to contain the disease. Is insurance secured to survive, Joydeep Ghosh explains.

Joydeep Ghosh, Business Standard
28th April

"Wimbledon’s organisers set for a $141 million insurance payout after Covid-19 pandemic," said news headlines in the second week of April after the tournament set for late June was cancelled.

The All England Lawn Tennis Association had paid annually $ 2million as pandemic insurance premium for 17 years—a far-sighted decision. The payout is good news for the Association as it will offset some of its losses, but insurers and reinsurers must be worried.

The pandemic, perhaps the worst since the Spanish flu of 1918, has spread its fangs across industries: global trade (except for medicines) has ceased, supply chains have collapsed, and industries like airlines, travel and tourism are facing their worst crisis. Some businesses may shut. It is quite likely that insurers would have to make massive payouts across industries, much more than they make for a seasonal CAT Event, a catastrophe caused by hurricane, cyclone, earthquake, flood, tsunami or others.

International insurance shock

Insurers were doing well till countries started locking up to contain Covid-19. According to a late-March report by Citi: “Over the last few years, global insurance stocks have performed well in most regions reflecting the strengths of the insurance sector: strong capitalisation, shift towards capital-efficient products, high growth in emerging markets and robust cash flows supporting attractive payouts in mature markets.”

Stocks of insurers were rising 6 per cent to 90 per cent in Europe, North America, Asia, Japan, and Latin America. Things changed in late February when markets realised that Covid-19’s impact on insurers could be significant. Stocks have corrected sharply, even 50 per cent or more, since then.

Insurers are yet to know the full impact of the crisis, but the signs are worrying. They have been asked by governments to give moratoriums to policyholders for premium payments, but alongside are expected to pay out claims.

Policymakers’ interference is worrying for insurers: “Claims could nonetheless be much higher than initially anticipated if policymakers put pressure on the industry to absorb more of the coronavirus-related losses incurred by businesses (particularly small and medium-sized ones) or individuals. Such costs cannot be quantified at this stage,” said the Citi report. Insurers' losses will be accentuated by the market rout in their stocks. Solvency ratios will affected too.

An April 16 report by S&P said Covid-19 has thrown a number of challenges for insurance claims: from handling claims when most staff is working from home, and assessing damages when there are restrictions on movement and travel. In the US, the number of people seeking unemployment benefits since mid-March has risen to 26.4 million.

No wonder, investors are worried about the consequences of low-interest rates--primarily in the US--and global recession on insurers’ balance sheet, business model viability, growth and profitability.

Regulators in Europe, Australia and Mexico have urged insurers to curb or suspend dividends, bonuses, and other discretionary capital distributions. Dutch insurers Achmea BV, ASR Nederland NV, AEGON NV, and NN Group NV, as well as UK-based RSA Insurance Group PLC, Aviva PLC, and Hiscox Insurance Company have decided to suspend paying common dividends or share buybacks.

Indian insurers brace for hard times

The Indian government, like many others, has asked insurers to give moratorium in premium payment for both life and health policies because of the lockdown across the country.

The Insurance Regulatory and Development Authority of India (Irdai) has interestingly allowed policyholders of unit-linked insurance plan (ULIP) to continue for a maximum of five more years. This is to recoup the erosion in the net asset value due to the sharp fall in the stock market. In a circular on April 7, it asked all life insurance companies to offer settlement to all policyholders whose ULIP mature by May 31, 2020 even if that option did not exist in the policy document. A policyholder opting for complete withdrawal will have her balance units encashed at the net asset value rate prevailing on that date.

Irdai has also asked medical insurers to cover expenses incurred for Covid-19 treatment, setting strict deadlines listed in a circular issued on April 18. A decision authorising cashless treatment has to be communicated to the network provider (hospital) within two hours of receiving a request or last-necessary requirement from the hospital either to the insurer or to the third-party associate (TPA) has cleared to be within the same time, whichever is earlier. Secondly, a decision on final discharge shall be communicated to the network provider within two hours from the time of receipt of the final bill and last-necessary requirement from the hospital either to the insurer or TPA, whichever is earlier.

Reports suggest that companies facing ‘business interruption and material damage’ in the lockdown are already reaching out to insurers for payment of ‘loss in income and profit’. Insurers may fall back on ‘force majeure’ or the ‘Act of God’ clause to reject such claims. Given that many of these companies are micro, small and medium-scale enterprises, it would be interesting to see the position that the regulator and government take.

Covid-19’s impact on life and livelihood is yet to play out completely. Reports suggest that insurance claims could run into billions and trillions of dollars globally. Yes, things could improve later as more people realise they must buy insurance. But new business premiums would suffer for at least the next couple of quarters. Insurers will have to keep their fingers crossed till then as they fork out claims.

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A few links for further reading

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