THE INSURANCE INDUSTRY: FOREVER CHANGED BY THE CORONA PANDEMIC?
By Peter Skjoedt, Skytop Contributing Author March 4, 2021
Peter’s educational background begins at Copenhagen University, where he earned his master’s degree in Economics, with an emphasis on International Economics Education. Peter worked as an Economist at both the Danish Manufacturer’s Association and Carlsberg International A/S before flourishing at the Danish Insurance Assocation (DIA).
During his time with the DIA, Peter worked his way from principal, to Head of Department, then Executive Director and International Advisor. While Executive Director, he was responsible for the Economic Affairs Department, dealing with prudential regulation, accounting, taxation, solvency, and investments.
Throughout his career, Peter still found time to participate in numerous working groups and committees, with both DIA and Insurance Europe. He has been a guest lecturer and an Associate Professor in International Finance and Pension Economics at Copenhagen Business School for over 20 years. Peter even spent a year as Acting Director of Economics and Finance at Insurance Europe (2006-2007), while maintaining his responsibilities as Executive Director at DIA.
Most recently, Peter sat as Director of Financial Stabiliity and Regulation at the Geneva Association, working in Zürich.
Human Tragedy Causes Other Related Tragedie
Not surprisingly, the corona pandemic and all its consequences are the dominant headlines of the media around the globe. It has been so for well over six months now, and will likely continue at least into 2021. The human tragedies naturally attract the most attention; the economic impacts follow: on individual sectors of the economy and economies as a whole, on people losing their jobs and on public finances.
For this discussion, let’s focus on the insurance sector and the economic implications for it from the pandemic. Insurance is a vital part of any economy for its capability to absorb risk and, hence, to protect individuals and companies from bad outcomes. The corona pandemic has led to huge losses for most insurers, thus some analysts and market participants are asking themselves how strongly hit insurers will be from the pandemic. Will they be able to perform their risk absorbing role in the future, or are we looking into business failures and less appetite by insurers to provide warranted risk coverage?
Fast Recovery Predicted
Recently, the highly respected research body of the Swiss reinsurer, Swiss Re, presented an optimistic outlook, on July 9, 2020, for a fast recovery of the global insurance industry. It stated: “ The sharpest economic contraction since the 1930s will lead to a slump in demand for insurance in 2020, more so for life products, with global premiums expected to contract by 6%, than for non-life covers (-0.1%). However, total premium volumes will return to pre-crisis levels in 2021 already, alongside more protracted recovery in the global economy.”
But Not for Insurer
A somewhat gloomier outlook for global insurers was presented recently by the likewise highly respected economic magazine, The Economist. In an article published on July 18, 2020 entitled, “The Threat of Irrelevance Spurs Insurers to Consider New Ideas”, the magazine acknowledged that insurers have been hit hard on both sides of their balance sheet – thus performing their role as risk absorbers – it also noted:
“Insurers have long been aware of the threat that pandemics pose to their businesses and have sought to minimise potential losses from them. Though they will not escape the covid-19 downturn unscathed, many may feel they have dodged a bullet. Instead the biggest risk the industry faces is that of irrelevance, as companies seeking protection from big new risks no longer see the point of insurance. The industry is scrambling to find ways to be helpful ahead of the next shock.”
The Economist basically noted that insurers – while absorbing big losses – in essence had not provided the cover for some of the direct and systemic effects of the pandemic which had been expected. It noted, rightly, that such systemic events are, in general, uninsurable on market terms. But if insurers fail to meet expectations from policyholders, politicians and the wider public, they may put the basic relation of trust – which underpins every insurance contract – at risk. And if that happens, it may render those insurers irrelevant.
Taxpayers are the Only Resolve When Insurers Fail
This should be a serious concern for insurers and, not least, for their shareholders. It is true that insurers are not able to provide cover, to absorb all risk, when huge and systemic events occur. But does the public understand and accept this? In any case, the covid-19 pandemic has made it clear beyond any possible doubt, that when economic nightmares occur – when the need for risk cover is at its extreme – only the public, i.e. taxpayers, are able to provide real cushion. Not insurers.
Ironically, both highly acknowledged institutions, Sigma and The Economist, may prove right. It is possible that the demand for insurance cover will quickly rebound after the pandemic. Investors, focusing narrowly on quarterly earnings, may be pleased and happy to underpin the insurance activities with risk capital. But at the same time, trust in insurers, this indispensable intangible asset of insurers, may erode. And erode quickly. Not only policyholders, but also the public in general, politicians, regulators, all the low-paid workers who strived and strive to fight the coronavirus and protect people, may question the role of insurers in societies of the future.
While shareholders, CEOs and board members may appreciate a speedy recovery, their real concern should be on the latter, not unlikely, outcome, i.e. the one of becoming irrelevant.
The Need to Understand a Gloomy Outlook for the Insurance Industry
Why this gloomy assessment on the global insurance industry? Firstly of all, because trust takes years to build up. But it can vanish, literally, in no time. Secondly, insurers and their political trade bodies, always present insurers as a key basic condition for societies to grow and prosper – this may be right, but if insurers are not seen to deliver on such promises, they may be seen simply as lacking credibility.
Thirdly, a number of issues, some following directly from the coronavirus crisis, will negatively impact on insurers in the future:
- Public pursess are wide open currently in many relatively well-off economies in order to provide the risk absorption insurers cannot provide. A time will come for fiscal tightening. Why not look to the preferential tax treatment some insurers and their policyholders currently enjoy? Why should taxpayers support insurers who are not seen to live up to their expected social obligations? Why should taxpayers take part in their search for yield which, of course, comes at the cost of high risks?
- There seems to still be a motion in most markets towards “fighting the climate challenge.” But it will be costly and those costs will fall most severely on less well-off income owners. Insurers profile themselves on their climate initiatives. Is that sustainable? And what happens when the easy identifiable (often tax subsidized) investment projects with a clear climate profile become less distinguishable as climate friendly? What will insurers do as investors and as underwriters?
- The corona pandemic has clearly illustrated the crucial role of public finances in alleviating the economic consequences of major catastrophes. As an example of the implications….Who believes any longer in a significant role of private insurers in providing broad health coverage? The solutions offered by private insurers have not been able to meet expectations
- Insurers increasingly want to explore the possibilities of using big data to set prices and insurance conditions. This is a move towards an individualisation of insurance. But the pandemic is moving societies towards more reliance on solidarity solutions, away from individualization. The use of big data in insurance is going to be less politically acceptable in the future, because the well-off would benefit at the expense of the less well-off. A positive side effect from this move away from using big data will be that mutual insurers, who are able to provide insurance solutions based on true solidarity principles, and to set terms and conditions with a longer term view, will flourish
- It is claimed that cyber-attack attempts have increased during this pandemic crisis. But insurers have provided unclear insurance policies in this area as they are unable to assess and price the risk and they will not in the immediate future be able to satisfy demand. Consequently, they will hardly be able to meet the demands for cover at reasonable prices
- On governance: There is an increasing demand that insurers (and others) behave in a way which is commonly accepted. If insurers are not able to live up to the demands of societies, what will and what should happen to executive remuneration?
Therefore, while the insurance industry may soon recover from the current economic downturn, the longer-term prospects seem gloomier. Unless insurers take up the challenge and try to fill the role they are supposed to fill. This does not mean providing cover for uninsurable risks.
Trust Drives Our Collective Success
It means understanding and protecting the fragile trust with the surrounding world they have established. It means not overestimating its own importance in society. And its means teaming up with the public sector in order to exploit new models for protecting societies against major risks. This could be in the form of public-private partnerships.
It basically means performing its primary role at its best. And looking a bit further than the financial results of the next quarter.
The Geneva Association