Posted: 09 Jun. 2020

How insurers can build financial resilience in light of the COVID-19 crisis

Catch up on our Insurance Services article series, including our blog post on COVID-19’s impact on mental health and the opportunity for innovation in the insurance sector.

Generally speaking, resilience means toughness, or the ability to recover quickly from difficulties. It requires being aware of potential pitfalls, making plans, getting fit and staying focused. It means taking a long term view, identifying options, and preparing and acting accordingly.

Financial resilience means essentially the same thing. Corporations will wish to sustain stakeholder value through time, so will rely on strategic planning, corporate governance, capital and risk management, and regular reviews to do so. Households will aim to protect livelihoods, so will set financial goals, accumulate assets, become insured, manage debt and cash flow, and review their financial situations regularly.

As such, commenting on financial resilience during the COVID-19 crisis is at once crucial, challenging and, potentially, risks stating the obvious (given the rainy day is now upon us). For example, corporates and households may struggle to take a long-term view while there are short-term needs to be met. They will have to rely on capital buffers which may be inadequate. And they may have little choice but to incur debt to endure through challenging and uncertain times.

The fittest corporations and the most fortunate households will recover quickest from COVID-19. Indeed, they will thrive, moving seamlessly to the “next normal”. For those most fortunate, this may result in greater flexing between home and office, better communications and connection, less commuting, more time in local communities, and overall greater wellbeing. Success through the COVID-19 crisis will therefore confirm the importance of taking a long-term view, of being financially astute, of building reserves, of diversification, of reducing debt and managing cash flow, and of having appropriate risk management practices and access to expert advice. We should all take note.

But what now, in the meantime, as we recover from COVID-19? The best outcome will be if everyone draws on their wits and their capabilities.

For insurers, that means relying on their risk management and business continuity plans, and for their leaders to leave nothing to chance. Actuaries, for example, must redouble their efforts to ensure that their stakeholders – and especially their Board of Directors – can “see what they see”. Insurers’ strategic and operational settings regarding capital, reinsurance, policy and claims liabilities, solvency, policy terms, distribution channels, premium adequacy, claims management and so on, may all be satisfactory despite COVID-19. But relevant questions must be asked and outcomes examined systematically. And insurers must review their business plans and strategy - are they still appropriate and relevant?

The COVID-19 pandemic has highlighted the need to expect the unexpected and to prepare for the worst, or for as bad as we can imagine or afford. It has highlighted that the best prepared will always take a long view, and trade off short-term costs with long term gains, accordingly. Insurers have a critical role to play.

(Chart taken from our State of the State 2017 series, cited from an Internal New Zealand Treasury Paper in 2016.)

COVID-19 is not the only challenge we face, or will. Scan the horizon! Among other things, insurers face significant ongoing change relating to customer expectations and ways of doing business, perhaps even accelerated by the current pandemic. And it is clear there will be significant challenges arising from climate change, directly and indirectly and in ways yet unimagined, that insurers must respond to in our communities and globally.

Recognising the likely impact of such threats, including through appropriate scenario analysis, testing of business continuity plans and adaptation of product design, combined with appropriate and committed investment in sound strategic management and corporate governance, will maximise insurers’ financial resilience. Doing so will help their customers and clients recover quickly from the significant challenges encountered, for generations to come.

In our next spotlight on challenges facing the insurance industry we will look at customer centricity during the COVID-19 crisis. Check in next week.

The content of this article is accurate as at 9 June 2020, the time of publication. If you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.

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Richard Beauchamp

Richard Beauchamp

Partner - Actuarial and Insurance Services

Richard has enjoyed a long and diverse career in the general insurance industry, in the UK and New Zealand. He has been the Appointed Actuary for one of New Zealand’s largest insurance groups, and developed Pricing and Customer analytics for one of New Zealand’s best known insurance brands. Richard’s focus is on helping insurers and other businesses to understand and provide for their customers’ needs, achieve their strategic goals and remain financially sound in the long run. Our talented team works with colleagues from across our wider Deloitte firm and Deloitte’s global network to advise on customer analytics, product design and pricing, liability valuation, capital, and regulatory matters, to help firms navigate an increasingly complex commercial environment.