The business of uncertainty

As COVID-19 has sent reverberations across economic sectors, so its ripple effect has been felt across multiple insurance categories. In the GCC, where these challenges have been compounded by reduced oil prices, the effect has been mixed. While it is still too early to assess the full financial impact of the pandemic on the insurance sector, the S&P Global Ratings report noted, as early as April 2020, that GCC insurers’ earnings were under threat. In June, global financial services ratings agency A.M. Best revised its outlook on the GCC insurance markets from stable to negative, citing the economic downturn across the region and an anticipation of diminishing insurance demand.

Property and engineering lines of insurance, for example, have felt the impact of the sharp rise in projects being put on hold or even cancelled as a result of the deteriorating conditions. More than 550 projects, worth over US$60bn, are known to have been suspended or delayed since the beginning of March this year in the GCC alone as clients take stock of the situation. Liquidity, a key issue for construction companies even in non-COVID-19 times, became a matter of urgency under COVID-19, pushing many in the GCC into cash-conserving strategies. For corporates combatting cash flow crises, many have requested a reduction in the sum insured while renewing property insurance policies. Similar requests have been seen from aviation clients after most airplanes were grounded.

This unprecedented grounding of airplanes was just one symptom of the heavy losses suffered by the travel and tourism industry globally. With lockdowns shuttering international borders, travel insurance policy sales fell by 90 percent for most insurers. Most insurers currently offer travel health coverage for life-threatening situations. However, as countries gear up to reopen their borders for tourism, insurers are planning to incorporate COVID-19 coverage, to include hospitalization and quarantine expenses, alongside traditional travel insurance. Notably, Emirates is the first airline in the GCC to offer a specific COVID-19 travel insurance, with every passenger automatically eligible. The insurance is active for 31 days after the first flight of the journey.

Lockdowns and quarantines also led to reduced road traffic and, as a result, the frequency of road accidents. This created pressure on insurers in the region to provide discounts on motor insurance premiums in the range of 15-30 percent. However, as populations ease back into life amid the pandemic, road traffic volumes are expected to rise. And, as people opt to avoid public transport in favor of private vehicles, this may yet result in an increase in the number of motor accident claims towards the end of the year. The move to embrace social distancing may also present an opportunity for the motor insurance sector through increased sales of low-end models/second-hand cars, which would have an impact on the overall top line sales. There is an increase in demand for the pay-as-you-use model of pricing over the traditional pricing model for motor policies. Comprehensive insurance sales might dip for private vehicles with more than two years of age as there is a tendency among those insured to shift to standalone third-party insurance. To date, motor insurance sales have been impacted by the drop in new motor vehicle sales across the GCC. These have fallen as a result of the pandemic as well as the contraction in government spending, which is influenced by oil prices. Publicly available information shows that decreases in new car sales are as high as 50 to 60 percent in the UAE and 30 to 35 percent in Saudi Arabia, where consumption has also been affected by changes to value added tax (VAT).

Healthcare was another sector impacted by the pandemic. Around 50 percent of regular healthcare services in the GCC were cancelled in the wake of the pandemic, leading to 8 million fewer patients per week. For insurance companies this has translated into a steep decline in non-COVID19-related medical insurance claims, which has had a positive impact on loss ratios. However, non-COVID19-related claims are expected to pick up by the end of the year.

More generally, the delay in implementation of mandatory medical insurance in Oman and Bahrain, as well as reduced demand for non-compulsory insurance products will have an impact on GCC insurance premium volumes in 2020. Currently, some GCC health insurance policies have pandemic exclusions. Going forward, changes can be expected in terms of types of coverage, conditions and exclusions. For countries where there is no mandatory health insurance coverage, demand for stand alone COVID-19 coverage is increasing in importance and insurers are evaluating the feasibility of a combined offering of COVID-19 coverage with income protection.

The impact of COVID-19 on business interruption claims will depend in large part on policy wording, but this area has the potential to be further affected by legislative changes and court rulings. Most standard business interruption policies contain exclusions for viral epidemics and require physical damage to property for coverage to apply. Some policies do provide an extension of cover when an insured has been unable to use their premises due to a lockdown imposed by the government or regulatory body where a virus outbreak has occurred. Specialty insurers and manuscript policies for large insureds who do not have clearly defined exclusions in their policies may be exposed to claims for COVID-19 related business interruption. It is pertinent to note that even without claim payouts, business interruption expenses are likely to increase due to an influx of claims and any legal costs in the event of a lawsuit.

Premises-related general liability claims are expected to decrease significantly for non-essential businesses, such as retailers and hospitality outlets (restaurants, bars, hotels) while general liability claims may increase for essential businesses (such as supermarkets, pharmacies, and box stores, as well as online retailers). COVID-19 general liability claims may occur from customers claiming that they contracted the virus from a business' operations, premises, or products. Another potential claims risk is from individuals who contracted COVID-19 while attending insured sponsored gatherings in excess of government mandates.

During the pandemic, many policyholders have lost their job or have taken a pay cut. This has translated into increasing claims for income protection/wealth products. Meanwhile, there has been a decrease in the sum insured for group life policies on account of layoffs. In addition, there have been requests from insured parties for payment breaks. Life insurance may not see a large volume of claims arising out of the pandemic, as many of those who succumbed to the disease were of the age cohort that typically may not have coverage. However, there is a risk that mortality for other cohorts may increase as a direct result of a fear of accessing hospital and medical care during this time. On the other hand, the pandemic has inculcated a habit of saving among the masses, resulting in demand for savings/investment products in the coming months. And, as e-commerce now becomes an integral part of life, the increase in use of credit cards has resulted in demand for group credit policies.

While some factors create challenges, others present opportunities. Demand has risen, for example, among directors and officers for liability products. This may be due to the fear among companies that employees could sue the management for not providing a safe working environment once they return to work or that shareholders or regulators would challenge the management for not managing the crisis appropriately. Demand for liability insurance for medical practitioners is also surging as there is a possibility of increased malpractice claims against healthcare providers. With the potential for an increase in claims and legal expenses, insurers may look at revisiting their pricing strategies for this product.

New products can be expected as the insurance industry strives to meet the demands of the new normal. The Saudi Arabian Monetary Authority (SAMA) recently approved the launch of insurance products to cover the cancellation of live events. Data shared by multinational cybersecurity software company Trend Micro Inc. shows that GCC countries recorded 1,735 email spam attacks, 216 URL attacks and 1,114 detected malware threats in Q1 2020. In the long term, the transition to virtual workspaces may increase the demand for cyber insurance and spur the growth and evolution of cyber insurance products.

The table shows the impact of COVID-19 on the policy and claims lines of business.

As insurers transition from the respond to recover phase, the following questions are among those that insurance executives, management boards and sector participants should consider:

• Customers: How do we assist our customers (both personal and commercial lines) to kickstart them back to recovery once the slowdown dissipates and the economy begins to move again?
• Governance: How robust were our governance and controls in assessing customer claims? Was our approach customer-centric? Have we
  proactively engaged with the regulatory supervisory authorities?
• Products: Has COVID-19 exposed our portfolio of business to risk? Have we revisited our risk appetite and determined our strategy going forward? Do we need to consider divesting out of classes of business or did we evaluate opportunities to enter new segments?
• Operations: How has the operating model held up during the crisis from a people, process, cybersecurity and technology perspective? Was our digital capability scalable and appropriate?
• Capital and liquidity: How did the business weather the storm from a financial stability perspective? Did we have sufficient buffers from a solvency and liquidity perspective? What is the action plan to mitigate the risk of a second wave?
• Outsourcing: Did the third-party service providers and partners in the value chain meet the challenges? Do we need to revisit their agreements?

It is clear that the COVID-19 pandemic will result in both positive and negative impacts for insurers in the region. Looking ahead, the demand for insurance as a risk mitigation measure will gain acceptance, new innovative products will surge including demand for Insurtech-based products, and there will be increased scrutiny over the terms and conditions by clients. Additionally, actuaries should consider the micro- and macro-economic effects of COVID-19 when pricing and reserving.

by Elias Ma’ayeh, Partner and Thomas Sam, Senior Manager, Risk Advisory, Deloitte Middle East