Introduction

According to the International Monetary Fund’s World Pandemic Uncertainty Index (WPUI), uncertainty surrounding the COVID-19 outbreak is double that of the uncertainty that was prevalent during SARS and avian flu that slowed the global Gross Domestic Product (GDP) growth. Persistently low global GDP growth rates could result in low premium growth for the insurance sector. The increase in insurance claims will depend on the spread of infections and the business disruption caused by the outbreak. Forecasts from healthcare experts¹ suggest that the number of cases could rise to anywhere between 2.5 million and 4.4 million world-wide by the time COVID-19 runs its course. However, the outbreak has also created an awareness among individuals about the necessity of insurance coverage, thereby resulting in a spurt in demand for insurance.

Consensus forecasts from economists and financial institutions predict global GDP growth between 2 percent and 2.5 percent from 2020 to 2021 (Figure 1). In the best-case scenario, the spread of infections will be confined between 2.5 million and 3 million cases. In the worst-case scenario, global infections will peak at 4.4 million cases. Based on the best-case scenario, economists predict global growth to hover around 2 percent and 2.2 percent. The worst-case scenario could witness a negative global growth rate of -2 percent for the rest of 2020 till 2021.

Calculating an average of forecasts from financial institutions, WNS DecisionPoint^TM estimates median global growth of 1.2 percent between 2020 and 2022.

IMPACT ON PREMIUMS

Europe is the worst affected region from the outbreak, with Italy and Spain emerging as the hotspots for the infection. According to figures from Insurance Europe, total premiums in Europe grew by 6.2 percent from 2017 to 2018 from EUR 1241 Billion to EUR 1311 Billion. Assuming premiums grew by the same rate between 2018 and 2019, a sharp drop in premium growth can be expected between 2020 and 2021. The degree of decline in growth will be determined by the extent of decline in GDP growth rates as outlined earlier.

IMPACT ON INSURANCE SUB-SECTORS

The insurance sub-sectors will experience varying degrees of impact from the coronavirus pandemic. Table 1 highlights the intensity of the pandemic on various sub-sectors and we look at some of the key sub-sectors in detail.

TRAVEL INSURANCE

The outbreak has resulted in a host of travel cancellations for businesses and individuals. In the U.K., the Association of British Insurers expects the industry to pay out at least GBP 275 Million worth of coronavirus-related claims, primarily to cover trip cancellations. This surpasses the previous record of cancellation pay-outs worth GBP 148 Million in 2010 when travel was disrupted by the Icelandic volcanic ash cloud.²

The U.K. travel industry expects 400,000 claims this year resulting from the outbreak, up from a total of 294,000 in 2010 since travel insurance policies are not designed to cover infectious disease outbreaks.³

In the U.S., several travel companies have tightened the terms of future coverage in order to avoid coronavirus-related claims. During March 2020, U.S. travel insurance companies limited the number of medical benefits available to residents while undertaking non-essential travel as defined by the government,⁴ which could be extended after travel resumes.

While COVID-19 has resulted in trip and flight cancellations across Europe, it has also led to a record increase in demand for travel insurance, which was observed in the rising sales of travel insurance in February and March 2020 when the virus started to spread in Europe. World-wide Google searches for ‘travel insurance’ surged by 92 percent in February 2020.⁵ Insurance companies across Europe saw sales skyrocket to as high as 425 percent during the last week of February 2020.⁶ An increased awareness among consumers is likely to result in more demand for travel insurance once lock-downs are lifted and travel restrictions are eased.

HEALTH INSURANCE

The largest impact will be experienced by health insurers who are caught between the twin struggles of increase in hospitalization and scarcity pricing of medical equipment, emergency services and treatment drugs.

The magnitude of the impact will depend on the degree of involvement of government and private healthcare insurance providers. Insurers that provide add-on policies to supplement existing primary healthcare coverage will experience less strain in comparison to insurers providing only primary coverage, especially with large exposure to senior citizens.

In the U.K., the National Health Service (NHS) has enlisted the support of the private healthcare sector to strengthen existing healthcare infrastructure and personnel by maximizing ventilation and intensive care support for hospitals. This has had an impact on the value of private healthcare insurance available to customers.

Treatments and benefits in non-urgent cases have been deferred in the wake of COVID-19. The value of private health insurance policies will remain constant over the next 12-18 months. However, the long-term value of these policies has been driven higher with the potential addition of diagnostics and complex treatments that could emerge during the hiatus.⁷

The U.S. accounts for the largest number of confirmed COVID-19 cases world-wide. More than half of the U.S. population receives its healthcare coverage through direct purchases in the insurance market exchanges. A majority of the COVID-19 testing and treatment costs will be borne by commercial health insurers. According to projections from Covered California, testing, hospitalization and other treatment costs in the U.S. will start to emerge during the latter half of 2020.

The outbreak has also caused a surge in the number of people filing for unemployment claims in the U.S. (Figure 4).

The week ending April 11, 2020 witnessed a record number of 5.5 million claims filed for unemployment insurance. Under federal law, every state runs its own unemployment insurance fund. States build their funds in good years and run them down during the bad years.

At the end of 2019, unemployed workers received USD 368 per week or approximately 45 percent of lost wages. Under general conditions, most states pay benefits for 26 weeks.⁸ The federal government also acts as a cushion for state programs during recessions. States can extend benefits for up to 20 weeks, half of which is paid for by the federal government.⁹

The USD 2 Trillion aid package announced recently by the U.S. government is expected to provide the required boost to the struggling insurance market in the country. The federal government would add an average of USD 600 a week in addition to state benefits, and an additional month to the period of time that people can get checks. This will increase the wage replacement rate for some people to more than 100 percent.¹⁰

When over 10 million¹¹ people simultaneously file for claims, processing the multitude of claims will become a challenge. State insurance systems will find it difficult to ramp up sufficiently. Approximately half of the states do not have enough funds to cover for unemployment insurance during a normal recession lasting for a year.¹² However, this will propel the federal government and states to set up a long-term funding source in the future, which will make it possible to secure funds at the cheapest possible rate and in the most cost-efficient manner.

A systematic budget execution plan, with procedures on procurement, will smoothen the process of doling out funds to a large population.

OTHER INSURANCE SEGMENTS

Insurers providing workers’ compensation coverage to emergency service providers such as firefighters, hospital staff, and workers in vulnerable sectors such as entertainment, manufacturing, transportation and retail will witness a rise in claims. The extent of government lock-downs, effectiveness of quarantine measures and stopping high-risk activities will reduce the degree of increase in claims.

In the life insurance space, the primary burden of claims will fall upon insurers dealing with mortality risks. The mortality risk of COVID-19 will be determined by demographic sub-groups and insurers’ exposure to those groups. In most countries, elderly and people with underlying health conditions have seen the largest number of infections and death rates. There is no certainty in the continuity of this pattern. Life insurers use significant amount of re-insurance, reducing exposure by transferring it to capitalized global re-insurers.

Insurers providing general liability and employee coverage to emergency service providers and workers in high-risk sectors such as retail, transport and manufacturing will bear the bulk of the increase in claims.

The extent of the increase in claims will be determined by how favorable a country’s legal system is for lawsuits. U.S. insurers are more prone to litigations than their counterparts in other countries. Insurers engaged in the provision of supply chain coverage such as events related to political upheavals, business interruption and trade finance will experience an increase in the frequency of such events, but there is uncertainty regarding the degree of increase in claims.

For business interruption and political upheavals, policies usually have significant waiting periods that become applicable only under catastrophic pandemics. For trade finance, premiums are fixed and are set before finalization of coverage capacity, and hence are not linked to economic activity. Thus, the impact on supply chain coverage insurers will be minimal.

THE BUSINESS DISRUPTION INSURANCE CONUNDRUM

As businesses and companies around the world are compelled to halt operations, questions on how much businesses can claim from their insurance policies have emerged. Companies claim they have been paying premiums for business disruption coverage for years, while insurers have stated that pandemics are explicitly excluded from such policies.

ROLE OF RISK ANALYTICS IN DESIGNING POLICIES

Experts highlight the importance of incorporating risk analytics while designing insurance products, thereby enabling quantification of risks. Quantifying pandemic risks require data that is difficult to get, and separate sources of infection and death rates for familiar pathogens will be needed for the analysis.¹³

One form of analytics-embedded insurance product is parametric insurance. Parametric insurance is designed to pay out on the hazards of a disaster, and the terms of the trigger are embedded in the insurance contract. This helps prevent probable gray areas or complications while settling claims. The claims adjustment process is a complex and expensive process, and can hurt the financial performance of insurance companies if not managed well. For this reason, parametric insurance products are ideal for pandemics, as they remove the administrative burden and reduce costs.

Risk modeling can also be used to increase the benefits of insurance products. A detailed modeling process focuses on the full-blown pandemic situation and the likely outbreak scenario, and encourages the development of a restraining strategy for the event. A properly quantified risk may push businesses to purchase non-physical business interruption coverage because if the majority of workers in a company fall ill owing to the outbreak, the company will be insulated from the risk of the outbreak.

THE ROAD AHEAD FOR INSURERS

Insurance companies will undoubtedly face mounting claims from businesses and individuals for disruptions caused by the pandemic. However, there are certain segments in the industry that could benefit in the medium term (Table 5).

CONCLUSION

COVID-19 has created global uncertainty of epic proportions that has surpassed the levels seen during the SARS and avian flu outbreaks. This has given rise to an uncertain economic outlook and tight financial conditions. Caught in this storm is the insurance sector which is struggling to cope with the dual challenges of low premiums and the vast number of claims from businesses and individuals. To ensure that only the most valid claims are paid out, many insurers have tightened the terms of their business coverage to exclude COVID-19. According to experts, insurers have been closing loopholes within existing contracts in order to reduce their exposure to future costs, making them susceptible to forceful pay-outs and legal battles that could stretch on for years. However, the pandemic has also brought simultaneous benefits for insurers such as low claims for re-insurers from travel insurance, reduction in losses for auto insurers arising from reduced vehicle usage and discounted insurance prices for holders of auto insurance. An increased demand for certain forms of insurance in the future (such as travel insurance) will help neutralize the damage resulting from increased cost of claims .

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