Published on September 18, 2020 by Holly Porter

The COVID-19 pandemic has seen national lockdowns, travel and public gathering bans, and closure of offices. This has hit the global economy hard, and organisations are looking to the insurance industry to rescue them.

The coronavirus pandemic has put significant pressure on insurance companies thanks to an increase in both general enquiries and those regarding a variety of insurance areas. This article explores the financial, reputational and legal implications of COVID-19 for the insurance industry.

Impact on Finance

As COVID-19 cases increase and governments are overwhelmed, insurance companies have become financially weakened. While this industry is well prepared for significant loss due to events such as pandemics, the current pandemic has taken more of a toll on the economy than previous ones.

The main ways the pandemic has impacted the insurance industry are on premiums on certain lines of business such as travel, events and trade credit insurance. For instance, demand for travel insurance for both personal and business purposes have seen significant reductions as a result of travel bans. Meanwhile, travel insurance claims have seen a dramatic spike.

The insurance industry has also seen a spike in events insurance claims due to other restrictions such as bans on public gatherings. Furthermore, some large events will cause great losses to insurance companies as they have policies covering them even in the event of a pandemic. The Tokyo Olympics, for instance, have been estimated at approximately $2bn coverage by analysts. Losses from these lines of business may become even more significant as events continue to be cancelled and travel bans remain in place and are reinstated in many countries.

An increase in claims in areas such as business interruption covers, transport, and the hospitality industry is also expected throughout the rest of the year. Meanwhile, unsurprisingly, lines of business such as property and home have remained relatively stable.  Furthermore, as customers have to stay at home, many choose to defer renewal of certain insurance policies or reduce coverage.

KPMG identified that there may, however, be some positive long-term financial impacts the pandemic will have on the industry. Following the SARS epidemic, we saw a temporary increase in critical illness policy sales in Asia. Similarly, the current pandemic could cause more people to reconsider their individual health insurance needs, which could ultimately result in a global rise in sales of health insurance and critical illness and life cover.

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Impact on Reputation

One area that is more overlooked is the impact the pandemic will have on the reputations of insurance companies. The media coverage of the sector has generally not been very positive as it has primarily focused on policy language that excludes claims related to pandemics and infectious disease. Consequently, some insurance companies have had their reputation damaged due to their responses to certain insurance claims.

For instance, some customers have thought they were covered by their insurance whilst in reality, communicable diseases were excluded. In some of these cases, the UK Financial Conduct Authority recently issued a statement that supported the insurers’ stand on this. However, these cases have still damaged insurance companies’ reputation as many customers feel that they are not taking responsibility and are not showing empathy towards them and society at large.

Impact on Legal 

The crisis has shown that many customers are not familiar with the market of insurance products and are not aware of what exactly they cover. As many are unhappy about not having their insurance cover pandemics, an increase in disputes and litigation is expected. This is especially so where the policy wording is ambiguous about covering diseases like this.

Bull, a partner at corporate and insurance law firm RPC, said that another issue with these claims is that calculating customers’ losses will be very difficult. As it stands, no one knows what their losses will be as the crisis continues to unfold.

Insurance companies should consult their in-house legal teams about the prospects of such claims. Furthermore, Deloitte recently said that insurance companies are currently reviewing and updating appropriate product terms and conditions so that they explicitly exclude communicable diseases. Doing so could prevent a situation occurring again wherein customers are uncertain about whether they are covered for a pandemic.

It is still too early to fully assess the impact COVID-19 will have on the insurance industry in the coming years because its impact across the economy remains dynamic. However, Lloyd’s of London and other industry analysts appear to be in agreement that the pandemic could become one of the costliest events ever for the insurance industry.

It has become clear that the lines of business within insurance most exposed to the impact of the pandemic include event cancellation insurance, travel, life insurance, private health, business and supply chain interruption, surety and credit insurance.

In addition to identifying the lines of business most exposed, insurance companies will have to develop strategies to manage the risk of reputational damage and prepare to respond effectively to the increase in enquiries and claims.

Words: Kristin Klungtvelt

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