How insurers will address the long-term impact of COVID-19

Insurance leaders were pleasantly surprised at their ability to transition to remote work and stabilize operations in the early weeks of the pandemic. Some have seen a strong push toward digitization, while others have had an increase in virtual interactions both within their own organizations and with their distribution partners. The transition has gone so smoothly that insurers are focusing on how to persevere the new momentum.

Digital and back-office distribution

With business travel and in-person meeting impossible, insurers transitioned to digital distribution and sales. This accelerated shift to digital distribution in sales and operating models has required overcoming significant hurdles, such as personal contact with potential customers. Nevertheless, IGLN participants agreed that the shift to digital distribution will continue and will need to be sustained for the long term.

An executive noted, “As a company, we coalesced quickly and moved all of our call centers from standalone buildings to the cloud in one weekend. We accomplished this in two days when we had thought it would take us four years to do this.”

COVID-19 has also forced insurers to accelerate the digitization of back-office functions. One director said, “With fewer people working in the office, more processes had to be taken online.” An executive added that he expects to see an increase in paperless processes going forward. Others foresee that the crisis may also accelerate cost reduction through new uses of data.

Continued remote work raises the stakes for leaders

Implementing remote work has been the most immediate operational challenge. Leaders and boards have had to change their ways of operating – relying on frequent conference calls or virtual meetings to keep abreast of new developments. Yet, stress, morale and mental health issues are emerging, as participants question how prolonged remote work will impact employee well-being and sustaining engagement. 

Return to work is difficult to navigate and cyber concerns arise

Participants agree that a largely remote workforce will become permanent in the insurance industry primarily because of the benefits. One director noted, “We are finding that productivity is actually higher now with our teams working from home.” However, even as employees seem eager to return to corporate work sites, questions remain, such as: 

• Lack of uniform guidance on reopening, which ranges from different states imposing different restrictions to lack of guidance from the Centers for Disease Control and Prevention (CDC) about safety standards for the work environment.
• Potential for litigation if workers return to corporate settings.   
• Need for stronger safety protocols, including enforcing strict measures around social distancing and constant use of masks.

And, with much IT infrastructure moved to the cloud and many employees using personal equipment for their work, companies may face heightened risk of cyberattacks. As EY Global Cyber Transformation Leader, Matt Hynes, said, “Insurance products on cyber are often lagging indicators. Attacks can take months, or years, to be detected, and cyber insurance claims will only be filed after the company learns they’ve been breached.”

Suggested ways for insurers to protect their data include:

• Paying rigorous attention to hygiene, doing a few things well can dramatically reduce an organization’s vulnerability; for example, executing regular data backups and maintaining a robust inventory of third- and fourth-party relationships  
• Implementing endpoint protection, as one EY leader said: “Shared passwords can easily be compromised. A second level of authentication, such as a one-time PIN provided via text message, is a good control. 
• Ensuring compliance from key vendors, so that companies can manage security beyond their own walls.

Insurers need to be responsive and creative

“Any time a risk profile or potential loss experience is only partially covered, there is an opportunity for the industry to get creative with new designs or protection schemes,” said one participant. This could mean a shift from simply indemnifying losses to loss mitigation and prevention. Potential also exists for the rise of new cyber protection products, as more companies take their operations online.

In addition, new collaborations may be possible in the wake of the pandemic. One director predicted that there will be more private and public partnerships at the country and global level. One prime example is a “backstop” for business interruption claims related to a future pandemic, where the risks are too great for a single private insurer or even the industry as a whole.

Global response to the pandemic

With the recent Pandemic Risk Insurance of 2020 that was introduced in the US House of representatives, the industry still calls for a globally coordinated response. Though IGLN participants agree, they note challenges in making this a reality.

For one, the industry structure is based on capital that is global, but plays out in national markets, such as Asia or the US. Traditionally, global insurers have responded inconsistently across national boundaries. As EY Global Insurance COVID-19 Response Leader, Simon Woods, said, a coordinated response to the pandemic is a “bridge too far.” He added that “there is not a room big enough to hold all these voices.”

Given the initial market volatility and sudden downturn in economic activity as COVID-19 became a pandemic, insurers were faced with preserving liquidity in the short and medium term while assessing the potential for cash flow constraints and asset revaluations.

Managing near-term financial challenges

In the first few weeks of the pandemic, many insurers took steps to bolster their liquidity, including drawing down revolving credit lines. Turmoil in the equity and bond markets also negatively affected insurers’ solvency ratios and caught the attention of regulators. 

Insurers are still faced with balancing consumer expectations and financial stability. In the early spring, they also struggled with reductions in premium income, as sales of new policies and premium payments declined. One participant noted, “Many global insurers are allowing customers to defer paying their premiums for 60 to 90 days without penalty. This will be a major issue for insurance companies going forward.”

Many insurers expect continued declines in new sales revenue for the next year or so. An executive said, “By and large, new business has fallen off the table and will be incredibly lower this year.”

In light of financial uncertainty and market volatility, a number of insurers modified or suspended dividend payments and share repurchase programs, partly as a result of pressure from European regulators. Some participants suggested that these decisions would be driven by reputational concerns as much as effective capital management. One director noted that many shareholders would suffer financially if companies withheld dividends this year: “A lot of older shareholders rely on those dividends as their yearly income. If a company’s revenue is not vastly impaired by this crisis, then it is unfair to suggest that those relying on dividends should not be paid.” Participants also said that public pressure to suspend share repurchases may be even stronger than pressure on dividend payments: “It’s a matter of optics, and in some cases, public policy.”

Navigating longer-term economic headwinds

The International Monetary Fund estimated in June that the global gross domestic product will contract by 4.9% in 2020.¹ While global growth in 2021 is projected at 5.4%, this is still 6.5 percentage points lower than pre-pandemic estimates.²  

IGLN participants foresee a long, slow recovery from the crisis as the economy confronts low consumer confidence and a slow rebound in demand. Most agree that low interest rates will persist for the foreseeable future and acknowledge that this may cause a shift in investment strategies for insurers.

By early summer, equity markets had largely recovered from their initial COVID-19-driven slump. With dismal unemployment figures, and a record number of new coronavirus cases in the US, the stock market near an all-time high represents a “huge disconnect” from reality. One participant noted some particularly difficult situations could emerge over the next two to three years.

The pandemic also presented other challenges for insurers, forcing them to grapple with exposures correlated across multiple business lines. They did not anticipate the accumulations stemming from COVID-19 and, as a result, they may look to reverse stress tests when planning for future crises.

Mounting consumer, political and legislative pressure to cover pandemic-related business interruption claims has only exacerbated the reputational challenges facing the industry. The sector is working on repairing its standing through acts of goodwill toward customers, such as refunding premiums and accelerating claims resolution.

Participants feel that the sector could further improve its reputation by reconsidering and communicating the purpose of insurance and of the individual firms in the industry. “It will require some deep thinking to clarify the purpose the industry provides in the grander scheme of society. Articulating that with authenticity will redefine the role of a leader,” said one director.

Many suggested that creative responses to the pandemic may demonstrate the industry’s ability to innovate and solve society’s larger problems, such as closing the protection gap in health insurance. One director added, “There are meaningful opportunities for the government to work with insurers on issues, such as sufficient health coverage for underinsured people.”

Regardless of the industry’s role in society or political and legal outcomes, the reputational challenges are substantial. One IGLN participant cautioned that the industry will have to take “a very careful” approach in handling business interruption claims and managing their reputations.

As politicians and regulators come more into the picture asking for more clarity around business interruption claims, the reputational challenges are substantial. Another added, “For much of the public, everything that the insurance industry is bringing forward as reasons why they could not insure pandemic losses is not understandable and not hearable.”