Insurance is an almost $5 trillion global industry. $5 trillion.
How is what is happening with the COVID-19 outbreak really going to affect the core of that volume of risk management business, and in what way is the InsurTech/disruption conversation going to affect what happens in the during and the after of the COVID-19 outbreak?
I’m saying not much, and not much.
Is talk of disruption to be put on hold? Policies will remain in force, agents and customer service people will be needed, claims accepted and adjusted, premiums accounted and converted from written to earned. The scope of coverage will remain the same (at least until some unexpected arbitrary act is invoked); existing reinsurance backing will attract attention and treaty terms will be revisited.
But then, on the other hand, insurance functions will be affected — a lot. The Insurance Elephant knows that insurance comprises all the many aspects of the business, and each will be affected in unique ways.
The insurance staffers
The millions who populate insurance staffing ranks will, in most part, be working in a new environment — a remote work environment. Insurance admin processes will be tasked; IT departments will wish they had taken more steps to harden their networks from the unexpected volume of use. VPN use will create a scent of cyber weakness that bad actors will be attracted to, and some insurance folks will fall victim to their efforts.
Claim volume will fall off for most covers with the exception of health, where claim activity will parallel the growth of coronavirus cases. Considering the reality of health cover as the lion’s share of the global insurance business, the challenges will be many for health insurers and providers. Public health programs will not be immune due to unprecedented demand on claim and admin systems.
InsurTech will suffer pangs of insecurity
It’s tough enough for a startup to get the attention of enterprise contacts; carriers’ contraction of financial focus to core business will make it impossible for the short-term. Even a perfect innovation solution will get less play now due to concern for the disruption of established methods. P&C virtual methods will broaden in scope and deepen in allowed severity, kicking the accountability can down the proverbial road. Fewer driven miles per policy will reduce auto and motor claim frequency significantly.
The reluctance of insureds to change any cover will present interesting hurdles for the hundreds of thousands of brokers and agents; large organizations trying to jump-start digital methods will suffer admin indigestion. Bordereaux will be anathema during the remote work period. (A bordereau is a written schedule of insureds, premiums and losses submitted to reinsurers under certain types of reinsurance agreements.)
On the other hand, companies that have digital products may thrive in the environment, particularly those that provide policies with pandemic cover. Insurers founded on an on-demand or gig basis will suffer substantial loss of business and will not have the need for cover. SMEs that just recently began to have suitable insurance products from clever startups will in their inability to operate no longer need the cover, and those related startups’ revenues will significantly dry up. Growth of digital insurers will slow as potential clients mirror businesses and focus on protecting cash.
Commercial cover has a problem — the big exclusion
The wording of most commercial policies relative to cover for pandemics is unequivocal: There is a need for direct physical damage (not present from the outbreak). In terms of business interruption (BI) cover, the absence of direct damage combined with wording that excludes pandemics makes BI cover a few-and-far-between circumstance.
It’s not that carriers conspired to exempt the cover or insureds overlooked it; it’s simply a risk that is daunting to underwrite based on the potential depth and breadth of an outbreak. One might estimate that BI claims could exceed $1 trillion globally (if there is even an agreement on what business interruption effects mean).
In spite of some political pressure to retroactively place BI cover, there appears little appetite to alter contractual terms after the fact.
What of cover that suddenly isn’t needed?
What of insurance policies for firms that have been closed due to government order? Liability cover is still needed, and certain physical damage perils, but what of workers’ comp or liquor liability, for example — the insurance cover that is driven solely by activity?
What of group insurance plans that are driven by employment levels? It’s certain that some employers will continue to contribute, but millions of laid-off employees now relying on government backstop programs will be reluctant to continue those benefits on their own. Will pension contribution policies continue at before COVID-19 (BC) levels? With regard to directors’ and officers’ policies, will decisions made (or not made) trigger claims?
Economic value remains
So, okay, the economic value of insurance will, for the most part, remain, but there are many cascading consequences that are occurring now and will continue into the immediate future. The industry needs to consider its efforts and focus on the core of the industry: risk sharing, risk management and serving the customer. Coverage gaps reside within the “before.” Disruption is here for the industry in a way no one wanted, but it won’t change the core of the business.
Let’s save all the learnings we will gain from this event and discussion of the opportunities to better serve the insured public for another day. That can be the dessert we enjoy once we get past all the cold vegetables COVID-19 is serving.
Patrick Kelahan, better known as “The Insurance Elephant,” is a building consultant and forensic market strategist with H2M architects + engineers, and many years’ experience in the insurance industry. He can be reached at [email protected], and you can follow him on Twitter at @InsuranceEleph1. The opinions expressed here are the author’s own.