Building insurance’s resilience amid the pandemic

The impacts of the coronavirus disease 2019 (COVID-19) pandemic have been various and rampant. Aside from infecting thousands of individuals at a fast pace, the pandemic eventually struck the operations of businesses — resulting in sudden shifts to remote work, closed or limited operations of establishments, and even layoffs and pay cuts.

Nevertheless, businesses have found their respective ways of riding the tides of the current crisis as they realized further the need to adapt and to be resilient. Among the sectors that have notably shown resilience amid the pandemic, especially in the global landscape, is insurance.

In its 2020 Global Insurance Market Report (GIMAR), the International Association of Insurance Supervisors (IAIS) noted that the global insurance sector has demonstrated both operational and financial resilience with the help of supervisory measures that provide operational relief as well as monetary and fiscal support measures in financial markets in certain regions.

“High-level results indicate that although the financial market volatility caused by the COVID-19 crisis in the first half of 2020 did affect the global insurance sector’s solvency and profitability (primarily through its impact on assets), insurers’ available capital resources generally remained well above requirements,” the report further explained.

Discussing the impact of COVID-19 on the global insurance sector from a supervisory perspective, GIMAR noted that the insurance sector felt the “most significant prudential impact” on solvency and profitability, primarily through losses on the asset side.

“Based on the data submitted for the first half of 2020, the solvency ratios of insurers have declined slightly, but overall the sector’s capitalization has remained resilient. Insurers reported that capital resources remained well above requirements,” the IAIS report explained.

The GIMAR also observed that the main impact on the asset portfolios of insurers was driven by the decline in value and/or holdings of the equity portfolio, which was partially recovered during the second quarter; a rise in cash holdings; and a strong increase in the “other assets” category for certain insurers.

The report also noted the pandemic’s “significant pressure on profitability, mainly for life and composite insurers”. In the first half of last year, IAIS continued, the pandemic significantly affected investment revenues in terms of impairments and investment losses from financial market downturns.

On the liability side, IAIS found that the results vary greatly, depending on the business model.

“For example, insurers involved in business lines like travel, event cancellation, business interruption, and pandemic/excess mortality insurance experienced a more significant impact, whereas insurers with more diversified portfolios were affected to a lesser extent, as claims in other lines such as motor insurance decreased significantly due lower global economic activity,” the association explained.

In terms of liquidity, the data IAIS gathered suggests that the impact has been limited, raising no immediate concern on the sector’s ability to fulfill obligations at this point.

“Insurers report that they have secured access to liquidity facilities, issued debt, and found stability in operating in money markets, including repo markets,” the report continued.

Aside from the certain impacts brought by the pandemic, the GIMAR also noted the supervisory response of insurers around the world to the pandemic. IAIS noted that the responses have primarily focused on the operational relief and resilience of insurers, with prudential measures aimed at capital preservation and enhanced risk management and reporting.

In monitoring financial risks, insurance supervisors were observed to have taken specific actions such as to preserve insurers’ solvency positions. These include conducting scenario analysis and stress testing as well as requesting insurers to temporarily limit, suspend, or eliminate dividend payments and/or variable remuneration.

Supervisors also put in place conduct of business measures that are aimed at ensuring the continued fair treatment of customers. These measures include requiring or encouraging insurers to provide financial and other relief to policyholders; emphasizing the need for clear and accurate communication and information relating to their policies; and making specific interventions relating to product design, underwriting, and coverage limits for COVID-19 exposures.

Regarding the continuance of operations, supervisors were observed to have worked on reviewing the readiness of relevant business continuity plans; recommending enhanced IT risk management and upgraded IT infrastructure and cybersecurity measures.

In addition, these authorities, acknowledging the huge operational strains experienced by insurers, have set in place measures such as temporarily delaying on-site inspections and misconduct proceedings; suspending or limiting regular data collections; and simplifying supervisory reporting to the needs of COVID -19 information, among others.

Through several actions taken by supervisors to meet their pressing needs, insurers were able to stand strong against the pandemic’s impacts. Nevertheless, as IAIS sees, challenges are still expected to be tackled by the industry.

“Vulnerabilities remain, given uncertainties about the duration and impact of the COVID-19 crisis. These vulnerabilities include the potential for decreasing credit quality of insurers’ fixed income portfolios and the impact of the deepened low yield environment,” the association noted. — Adrian Paul B. Conoza