The impact of COVID-19 on general insurers has different ramifications across pricing, underwriting, claims management and reserving depending on the class of business. 

Travel insurance:

We expect increased claims from customers diagnosed with the virus before or during their trip, as well as those seeking premium refunds due to cancellations and travel bans.  These claims will depend on the date of travel and policy inception dates, and exclusions and coverage clauses related to pandemic events. 

• While travel insurance premium volumes will reduce significantly due to existing travel bans and ongoing fears, there will be a catch up when travel bans are lifted, fears abate, and people revisit their delayed travel itineraries.

Commercial property including business interruptions (BI):

While the economic slowdown and reduced business activity will mean lower premium volumes from commercial property, there is a higher risk of vandalism, arson and theft due to both the unoccupied commercial premises and the economic downturn. 

• From a BI (and contingent BI) perspective, the exposure will really depend on the nature of cover and exclusion.  While typically BI insurance covers disruption to business following physical events with pandemics being excluded, some policies may include pandemic coverage. Insurers need to reconsider how their policies will respond to COVID-19 and whether there will be pressure from the community to support SME businesses in relation to BI and CBI interpretations.

Event cancellations:

We expect large losses in this area, as event policies frequently extend cover to pandemics.  This class of business will be exposed to the thousands of events cancelled worldwide, from the small regular community events to the national sporting events, and global events like the Tokyo Olympics which is estimated to have $2bn of coverage.

Liability claims:

The majority of these claims relate to ‘slips and falls’ and there will be a number of injuries with a significantly lower claim frequency.  However, there will be increased exposure to duty of care breaches in relation to visitors, contractors and those under care. With the potential for new class actions in sectors such as cruise operators.

Motor Insurance:

Significant decreases in driving activity in the community will markedly reduce motor insurance claim frequencies.  As a result, some insurers are already offering premium discounts and rebates to policyholders.  There will be lower activity levels across the motor insurance value chain, including rosters of repairer networks and levels of salvage and subrogation.  Other impacts on motor repair costs will be dictated by overseas supply chain disruptions and movements in the exchange rate.

CTP:

Similar to motor insurance, the significant decrease in driving activity will also markedly reduce CTP claims frequencies.  Some of the effects that impact Workers’ Compensation will also impact CTP. These include delays in healthcare provisions resulting in potentially poorer outcomes for some injured drivers. In addition, the current economic environment will afford fewer ‘Return To Work’ outcomes which is likely to increase CTP utilisation by injured drivers.

Home and contents:

We anticipate a reduction in home and contents claim frequency in the short term due to fewer thefts, but this will be mitigated by a potential for higher accidental damage claim frequency, given people are spending far greater amounts of time at home.

Lenders’ Mortgage Insurance (LMI):

The impacts will be deferred given the six-month mortgage relief by banks, however higher unemployment and a forecast drop in house prices are likely to lead to future higher claims.  The uncertainty surrounding this class rests on whether the claims experience will be significantly higher across most of the LMI portfolio or whether it will be contained to certain sectors. 

• This will depend on continued support from initiatives afforded by the banks and the government, as well as unemployment levels and the magnitude and duration of the economic downturn.
• These will all impact the extent of mortgage defaults and, in the event of the claim, the property sale price to pay off the remaining mortgage above the 80% Loan to Valuation Ratio (or higher than 80% depending on nature of LMI cover).

Trade credit insurance:

As many businesses experience the effects of supply chain disruptions and the economic effect of the lockdown, the trade credit insurance coverage of a business’ cash-flow for losses arising from debtor defaults on payment, invoices or insolvency is expected to increase in some areas of the economy three to four fold[1].

• Some insurers have historically offered or are currently offering services around credit management signals and debtor alerts to help their policyholders stay on track ahead of impending trade credit claims. 
• In these uncertain times, insurers will need to be aware of the service levels that have been promised to their policyholders and how they are delivering them.

Builders Warranty:

Given the economic downturn, adverse claims are expected and will pressurise builders’ solvency and liquidity levels. COVID-19 is likely to result in higher builder insolvencies resulting in increased non-completion claims or possibly builders performing sub-standard work which will then result in future defect claims.

For actuaries making reserving and pricing judgements starting from the 30 March balance dates and future periods, there are judgement considerations that need to be put into place around the impacts from:

• The above class by class dynamics on the central estimates (both claims and premium dynamics).
• Current conditions on economic assumptions (lower discount rates, lower future CPI/wage inflation in the short term, potential for inflation surge when lockdown eases or in a few years from now when world economies recover and impacts on superimposed inflation).
• Impacts on risk margins given the current higher uncertainties, carefully considering premium liability assumptions (especially loss ratios historically linked to outstanding claims assumptions), results of future Liability Adequacy Tests, how to perform roll-forwards and actual vs. expected analyses given low claims assessment/processing activity and lower levels of human activity and so much more.

In this turbulent environment of uncertainty one thing is certain, greater attention to actuarial professional judgement is needed to manage the above complex considerations when determining and recommending future estimates and scenarios.

In our next blog we set out the general insurer implications for class of business effects on Workers’ Compensation and Professional Liability.

[1] Actuaries Institute COVID-19 Taskforce