The spread of COVID-19 across the globe and the associated economic fallout are evolving extremely rapidly, creating one of the most defining challenges of our time. In the past days, I have spoken with executives at some of our leading customers to understand how this is likely to impact our industry and I’m sharing my perspective here in the hope that it may be helpful as we all seek to navigate these challenges.
Looking forward, it seems useful to consider three macro periods. First, for the coming weeks and months, we should expect new information and recommended actions to continue to unfold rapidly as we come to grips with the state and trajectory of the dual public health and economic challenges we face. Second, we should expect a temporary but necessary “new normal” to stabilize—this may last possibly another 12-15 months, the time period most experts think will be required to adopt a vaccine at scale. Third, some aspects of this “new normal,” initially thrust upon us by necessity, will persist long into the future.
An executive I recently spoke to referred back to 2001 when an airline passenger (unsuccessfully) attempted to detonate a bomb concealed in his shoes. Twenty years later, he noted, we still take our shoes off at airport security checkpoints—events can have long-term consequences and some safety measures may continue in perpetuity.
Now and in the Coming 8-12 Weeks
Stock and credit market shocks will hit carriers’ balance sheets and capital reserves. In general, carriers think about the investment side of their business as somewhat siloed and independent from the operation of running an insurance company (finding customers, collecting premiums and paying claims). These shocks, therefore, in and of themselves will likely have minimal impact on the operating side of an insurance carrier.
However, certain more thinly capitalized carriers may see operational constraints if their capital reserves suddenly fall below key thresholds required by regulation or credit rating agencies. Access to new capital will be limited and, combined with smaller equity bases and lower market capitalization, will likely translate into lower risk appetite and lower premium volumes.
Consistent with the broader economy, certain carriers will struggle more than others to maintain business operations efficiently in the face of remote work. This will lead to some operational drag as we adjust to working remotely. We’ve heard across the board that this event will be a true test of cloud-first infrastructure for core systems, PAS, placement systems and vendor systems. This is the first time these systems will be paired with a fully remote workforce. Legacy systems across the industry will be an increased source of friction relative to more agile systems.
Certain lines of business will be materially depressed (BOP policies for restaurants, for example). This may doubly impact carriers if the government forces them to cover pandemic-related losses even if they were previously excluded from policies. Meanwhile, usage profiles for covered property, including auto, may see dramatic changes.
The Temporary “New Normal” Over the Coming 12-15 Months
In this phase, selective remote work or being “remote work-friendly” will be a business necessity. We’ll all get a lot better at using the necessary tools (Zoom, Google docs, Slack, Docusign and others).
During this time frame, field inspectors and adjusters may also be reluctant to enter others’ homes; carriers may be increasingly reticent to expose their workforce to such risk while balancing the need to conduct business. To this end, carriers will continue adopting a spectrum of technologies that can aid in the risk selection and adjusting process that enables a reduction of person-to-person contact. As an industry, we’ll have to adjust to operational changes to work in an environment with the ongoing risk of infectious disease. This includes self-inspection apps, remote data and other offerings that had been gaining steam even prior to this outbreak.
As mentioned above, a lot of good policyholders (again think restaurant BOP) will have gone away quickly. Now they may roar back—creating an opportunity for increased market share going to the carriers who can scoop these up with the least friction. For carriers, an increased ability to pre-underwrite and act upon targeted marketing will likely be important to capture this rebound as businesses rebuild.
The rebound won’t be relegated to commercial lines. Following the short-term economic shocks outlined above, these major disruptions may soon lead to more homeowner property insurance quoting activity in the medium term. Treasury yields will continue to be at historic lows, driving increased activity as homeowners refinance. Recent numbers show refinances were up 79 percent in early March, according to the Wall Street Journal. As consumers look to squeeze budgets, they may also shop for more affordable policies.
Exposures will also change in the medium term: working, exercising and cooking at home rather than the office or third-party sites will change the nature and control of risk. Similarly, exposure in some geographies may also change. Key catastrophe-exposed zones are often tourist destinations and may not see a resurgence to similar traffic levels.
As a more speculative point, we may see a large drop off in personal vehicle utilization—particularly in the next quarter as consumers stay home—which may positively impact loss ratios for auto insurers due to fewer collisions and other claims. Other classes, such as aviation, cargo, life and health, may also see changing risk profiles in a world with less travel and less pollution.
Changes That May Persist Longer-Term
In the long run, the above changes—including remote work and risk assessment technologies—could shift how people, businesses and insurers work indefinitely, creating an opportunity to rethink, from the bottom up, current processes for evaluating and underwriting risks. The successful adoption of cloud-first processes and systems will be optimized and become the new operational norm for the majority of carriers.
The landscape of insurance products may also change, with a shift toward UBI-focused policies for auto (and potentially other assets as well). The small commercial insurance industry, primarily restaurants, may be changed forever, as dining from home and the adoption of “cloud kitchens” accelerate and reshape restaurant risk profiles.
We’ll also likely see the integration of pandemic risk models into policies with more specific exclusionary language and, perhaps, additional insurance products that target a future event. Lastly, business interruption may be carved out as a new standalone exposure, much like liability and cyber were recognized as distinct risks to analyze and price.
Change is typically a bit uncomfortable, and at the moment it is being forced upon us at an unprecedented rate, but I believe we will come out stronger as a result.