A life less ordinary post COVID – overcoming a new level of risk and uncertainty

COVID19 is the single most important topic right now for people and businesses around the world, and uncertainty over the coming weeks and months means it will be top of the agenda for the foreseeable future.

Whatever your thoughts on the decision-making behind country-wide and ongoing lockdowns across the globe, these unprecedented measures continue to impact businesses and individuals everywhere -- some to a greater degree than others.

For insurers, years of scenario modelling and risk management expertise have put the market in a more resilient position than other business sectors.

In its Spring 2020 report for the life insurance industry, analysts at Morgan Stanley described the sector as "bracing for pandemic impacts", though initial, direct impacts are expected to be modest. The most significant effects are likely to be felt through the impact of low interest rates, weaker equity markets, defaults and adverse ratings, migration in portfolios, as well as write-downs of alternative investments.

A timely roll-out of crisis plans at the beginning of the pandemic led to the early suspension of buybacks, and whilst that in turn may weigh on earnings prospects, analysts are not expecting capital shortfalls any time soon. It says the five most important pandemic factors are direct claims, macro sensitivities and their impact on future results, capital management issues resulting from buyback suspension, investment portfolio hits and future sales prospects.

Stress testing conducted by AM Best, meanwhile, raises concerns that life and health insurers considered to be particularly sensitive to the effects of the pandemic. They include those with high asset and mortality risks; insurers with material exposures to mortgage loans; carriers operating in domiciles in higher country-risk tiers; and companies with smaller capital bases. And, as the market begins to think about potential outcomes for the future, questions around the efficacy of the Solvency II matching adjustment have also resurfaced.

Meanwhile, there are the less complex but nevertheless demanding operational challenges that come from ongoing lockdowns, and beyond these, changes to working environments as insurers seek to maintain business continuity with a largely remote workforce.

It represents something of a turning point for those that have not considered such an extended (or for some, permanent) period of flexible working. The unprecedented challenges with which all organisations are now faced present either a threat or an opportunity -- depending on how open to change they are -- and how well prepared for adaptation.

Conversations about policy wording will need to be had urgently, but under the greater scrutiny of regulators and customers, following a series of disputes and increasingly heated debate across the industry as a whole over exclusions and coverage levels.

Finding a solution to the protection gap that currently exists in relation to pandemics is high on the agenda, with the industry calling for a similar solution to that offered by Pool Re and Flood Re, the UK government backstops for terrorism and flood risk respectively. And after just a few weeks, some progress has already made in the trade credit markets in the form of a UK treasury-backed temporary reinsurance scheme. Welcomed by the Association of British Insurers, the scheme takes the form of other similar solutions adopted in Europe and in Canada.

Looking ahead, it is too soon to consider the long-term implications of this pandemic for life insurers, but what is certain is that the role that technology can play within these wider discussions is crucial now and in the immediate future.

RNA Analytics is a global actuarial and risk management firm headquartered in the United Kingdom. With specialist teams positioned across Europe, the USA, China, Hong Kong, Japan South Korea and Taiwan, we provide actuarial and risk management consulting services to support global life insurance organizations, non-life insurers and financial institutions around the world.

Our unique skillsets help insurers to more accurately model and perform risk and investment calculations, using structured data analysis and bespoke software tools to model scenarios that guide profitable decision-making, disclose threats and protect management teams from exposure to implicit risks.