Insurance in age of COVID-19: A Game Changer?

Insurance is a contract, represented by a policy, in which an individual or entity receives finance protection or reimbursement against losses from an insurance company. Insurance companies base their business models around assuming and diversifying risk. The essential insurance model involves pooling risk from individual players and redistributing it across a larger portfolio.

However, the Coronavirus (“COVID-19”) pandemic has amplified the importance of the insurance sector role in development and in economic resilience of business and individuals. COVID-19 is not only a health crisis but a “black swan” event. COVID-19 is affecting the insurers in a unique way, as it impacts both the asset and liability sides of the balance sheet and threatens business continuity as well as future economic growth. The COVID-19 pandemic is an acid test for insurers. A pandemic is a stress most insurers have tested and scrutinized in their financial risk analysis, operational risk analysis and business continuity planning.

The spread of COVID-19 and related business closure have had a number of implications for the value of insurance companies’ liabilities due to change in individual and corporate behaviour. A number of insurance companies across the world are partially refunding policyholders for premiums paid for personal motor vehicle, commercial motor vehicle, worker’s compensation, commercial multi-peril and any other insurance line where the risk of loss has fallen substantially as a result of the COVID-19 pandemic.

The pandemic upheaval has made people value the importance of insurance and apprehend the consequences of not having one. As per the directions of the Insurance Regulatory and Development Authority of India (IRDAI), the insurers have introduced Coronavirus-specific health insurance products that provide dedicated coverage against the deadly virus. Further, realignment of workforce towards customer service by insurance organizations witnessed to tackle the workload as best as possible.

In the age of COVID-19, digitalisation become a necessity and undoubtedly accelerated the agency network by replacing reliance on face to face interactions with customers. Further, technology is changing the business models of insurance organizations. Development in technology such as AI, Big Data and Block chain are helping established insurers to develop new ways of buying insurance, led by the needs of the customer. Insurance companies are evading complex core IT systems by capitalizing in software-as-a-service applications, which they use for operations, distribution, HR admin, and commission processing, amongst other tasks. These tools amended the ways the insurance companies worked, including automation of some of the traditional, physical tasks.

Application Programming interface (“API”) enabling the creation of insights-driven offerings as they integrate data from multiple sources. Blockchain technology provides the advantage of secured data management across multiple interfaces and stakeholders without loss of integrity. Tyche is an interactive platform that allows casualty underwriters to assess casualty risk by blending risk-relevant, open data with machine learning.  Improved business outcomes in customer experience, cost optimization, operational efficiencies, market competitiveness and newer business models profoundly impacted by Artificial Intelligence (“AI”) and automation.

However, at home workers using unsecured technology devices and home Wi-Fi networks increased the likelihood of cyberattacks, potentially triggering an avalanche of standalone cyber insurance claims. Increased bankruptcy risks also affect the trade credit line of insurance, which protects against the non-payment of outstanding debt.

Further, in the wake of COVID-19 pandemic and its subsequent economic impact on liquidity and cash flows in the Indian banking sector, regulator IRDAI has decided to examine the feasibility of introducing surety bonds by insurance companies for road contracts in the country on request of Ministry of Road Transport and Highways. Currently, surety bond for contractors is not being offered by insurance companies in the Indian market. The insurance legal and regulatory framework does not permit underwriting of bonds that guarantee performance and bid securities as they are financial instruments and not conventional insurance products. The IRDAI has set up a panel to study the legal framework and suitability of the Indian insurance industry or any other sector to offer such bonds.

Insurance organizations are determining the best possible strategy to mitigate the impact of COVID-19. Further, life, annuities and retirement sectors will be greatly affected by environmental factors, urbanisation and changing consumer behaviours. Levers such as customer experience, capital impact, revenue impact, liability exposure, regulations and government directives are taken into consideration to determine which business services need to be prioritized to overcome the impact of COVID-19. In addition, the actions that insurers choose to take will depend not only on their national or regional markets, but also on their strategic intent, core capabilities, availability of talent, capital and organizational culture.

(This article is written for academic purpose. For queries/discussion, author can be reached via email garimamittal@live.in )