The insurance market in the current climate

 

Is the Coronavirus emergency impacting insurers’ solvency? This is the big question that insurance business leaders are looking for clarity on. Dominic Sharp, Head of Actuarial Services and Darren Vinales, Senior Actuary, Robus Group, reports

 

Distinguishing between the short-term evidence of what has happened so far and what could happen in the medium to long term is important to consider.

Looking at actual impact on insurers, it’s still early days. Underwriting volumes are down as people stop instalments, decide not to renew or not to take up a new cover. Any lines that are sold as add-ons will be materially impacted, e.g. extended warranty and motor ancillaries such as gap insurance. Gibraltar is already seeing this, where a lot of this kind of business is underwritten. It is also seeing reductions in claims frequencies on both Motor and Household policies.

These impacts (particularly Motor) have been noted. Steve Quinn, Managing Director of Premier Insurance commented, “The Motor market is challenged in much the same way as all industries across the globe in not knowing how long this uncertain and distressing period is going to persist for all concerned, and what the net effect is going to be for the various stakeholders in the market”.

Some other insurers have experienced significant drop-off in premium volumes and claim frequency and added that they are focused on claims inflation as repair networks and supply chains are squeezed.

More widely, in terms of direct impact, we expect that travel insurance and business interruption will be heavily impacted but there is little exposure to these lines for Gibraltar insurers.

So, counter-intuitively, we consider that the short-term impact on solvency ratios of Gibraltar insurers is likely to be beneficial, primarily as a result of falling premium income.

In the medium and long term, the impact is harder to predict with considerably more influences on the ratio to factor in.

Whilst Covid-19 is a humanitarian disaster, the number of people affected in the wider population is still a relatively small percentage and likely to remain so. This is particularly the case away from the front line which is where the insurance industry is positioned. Also, the insurance industry is generally more mobile than most and so it is considered that it is unlikely to be materially impacted from an operational perspective. We have seen this with Gibraltar insurers that we are familiar with; operationally, they have proved resilient with most key functions now relocated to home environments.

Shareholders of (re)insurers may be less willing to commit capital due to liquidity and/or solvency concerns. Some reinsurers will become insolvent resulting in credit events for insurers.

Investors may be similarly less willing to provide capacity. Capacity in the reinsurance markets may be affected which could result in further increases to reinsurance costs coming hot on the heels of rate rises due to the UK’s Ogden discount rate decision in July 2019.

Insurers’ expense base is largely fixed and so reductions in business volumes will reduce profitability. Adjusting the expense base is slow and can incur additional costs.

The markets have suffered and so there will be pressure on asset valuations. Insurers tend to be conservatively invested as a result of Solvency II but we think there will still be an impact at some point.

Insurers will need to focus on liquidity from all sources although it is expected that state interventions will help here. The likelihood of insolvencies caused by liquidity strains will increase.

There is a potential increased risk of frauds, both in the scope for fraud and the likelihood of it occurring as people’s circumstances deteriorate.

Finally, it is likely that with the lockdowns, activity such as claims adjusting will operate less efficiently with the potential for increased claims leakage and a slow-down in settlement patterns.

It is hard to say exactly how solvency ratios will be impacted since there are many influences, as we have set out. However, it is believed that negative influences will outweigh positive ones meaning that solvency ratios are likely to suffer in the medium to long term with the resulting potential for increased regulatory scrutiny and, ultimately, failures.

Insurers should think through these issues to see how their businesses are exposed. In our experience it is important to balance quantitative analysis, including running revised scenarios through their capital models, and qualitative analysis where the focus should be on risk management. This will help to gain insight into the dynamics and to understand which influences are dominant.

In this more volatile environment insurers should be considering the appropriateness of their risk appetite statements as well as their capital buffer over regulatory minimum levels.

It is expected that all Boards will need to revisit business plans and ORSAs as existing scenario modelling is unlikely to capture the full range and extent of stresses to businesses caused by Covid 19.