Why all the different disruptions, knock-on impacts, and unintended consequences facing insurers need to be assessed and addressed holistically.

  • From cost control and claims handling to compliance and capital management, the COVID-19 outbreak has turned processes and procedures on their head
  • While the key issues within each of these individual areas might often seem clear cut, even self-evident, the complex inter-dependencies among them could give rise to damaging and unintended consequences 
  • A holistic assessment and orchestrated response to these issues are critical. Yet many insurers lack the resources, management bandwidth, and full set of dedicated skills to achieve this

While ‘stay at home’ orders may now be easing, the landscape into which insurers are emerging is fundamentally different to when we went into lock-down.

The bulging in-tray stretches from how to control the costs of socially distanced operations to sustaining client and employee engagement when the face-to-face interaction is still so restricted. Some of the issues stem directly from the pandemic, and its impact, while others are longstanding priorities that have been heightened by the crisis.

One of the big dilemmas is how to address all these different elements, while still running active business. Which priorities are most pressing? What expertise, time, and resources does each need? How do we monitor and measure the effectiveness of each remedial action?

Knock-on impacts 
In isolation, key objectives might appear to be reasonably clear cut – get the costs down, promptly adjust and pay valid and covered claims, maximize reinsurance recoveries, and keep regulators on-side, for example. Yet the interactions and inter-dependencies among all these issues can create a potential minefield of catches, complications, and even unintended consequences. Clear examples include the impact of cost cutting on client relationships or the potential solvency risks of extending the scope of business interruption claims in line with regulatory (and, perhaps, legislative) pressure. More complex and nuanced challenges include potential differences in coverage between direct policies and ceded reinsurance, and how to communicate and manage the implications of this among the parties and with regulators and rating agencies. The only sure way to get a grip on all these actions, and reactions is to take a holistic approach.

Ten key issues 
What then are the key issues that need to be addressed, and what’s at stake? These are the big-ticket items that keep coming up in my conversations with insurers, and reinsurers. In outlining the most pressing challenges, and their implications, a key focus is how actions in one place could impinge on objectives elsewhere.

1. Business operations
Insurance and reinsurance are people businesses, in which face-to-face engagement – conferences and casual get togethers, as well as formal meetings – has always been essential in developing strategy, fostering new ideas, and closing the deal. How will the industry adjust to a new dynamic that precludes – we hope temporarily – this kind of engagement? Video conferencing can only go so far in replicating it.

2. Underwriting discipline and management
COVID-19 looks set to accelerate the scaling back, and/or move into run off of unsustainable business. Regulators, rating agencies, and major shareholders are calling for greater discipline in insurers’ underwriting strategies, underwriting metrics, and business remediation activities.

3. Distribution
There are already signs that the pandemic will lead to a further hardening in premium rates. The challenge is the potential impact on distribution mechanisms. For example, might insurers consider an extension of delegated authority arrangements to take advantage of price rises? How might such an increase square with a renewed focus on underwriting management and discipline?

4. Employee engagement and retention
Insurers, brokers, and service providers have faced a difficult choice between retaining their employees and maintaining salaries on the one side or opting for the alternatives of reducing pay or furloughing and cutting staff numbers on the other. Employees have also faced the dislocation, and potential stresses of a rapid shift to remote working, which for some has been a wholly new experience. Support and communication are therefore critical, especially as uncertainty over job numbers, and disruption to normal working could continue for some time.

5. Regulatory compliance (and advocacy)
The NAIC, along with some state regulators, have sent out questionnaires asking insurers to assess their ability to respond to submitted, and prospective, COVID-19 related claims.

The challenges include proposals by some state legislatures to expand – retrospectively – business interruption cover to ‘small’ businesses regardless of policy provisions. The payment mechanism proposed seems to be based on carriers’ net written premium rather than actual claims experience. A disciplined underwriting entity with minimal claims exposure may therefore have to pay out, proportionately, as much as a less well-controlled operation with significant exposures. It is therefore important to formulate a regulatory and stakeholder communication, and advocacy plan to address these potential anomalies.

6. Transparent, efficient, and appropriate claims processing
The uncertainty over COVID-19 business interruption claims is heightening the focus on insurers’ response. Insurers’ treatment of claimants is under the spotlight, and could be a PR disaster if handled badly. Yet, if unchecked – a surge in claims could put solvency at risk.

7. Operating ratios
Many insurers face the pincer of falling – and delayed – premium income on the one side, and higher costs from remote and distanced operations on the other. Standard cost cutting measures such as staff reduction could dent customer satisfaction. Having demonstrated their value during lock-down, InsurTech innovations, and emerging technologies such as blockchain could help to drive down costs without impairing service. However, operating ratios may be affected by the upfront investment.

8. Loss ratios 
Loss ratios will be impacted by the emergence of unanticipated claims (mainly business interruption and workers’ compensation), as well as an increase in allocated and unallocated loss adjustment expenses arising from these submissions.

9. Counterparty communication
Transparent and active dialogue between ceding companies and their reinsurers has always been critical in dealing with claims and sustaining a mutually beneficial relationship over the long-term. The emergence of COVID-19 business interruption and other related claims makes such dialogue even more critical, though as outlined earlier, face-to-face engagement is harder. Just as regulators and rating agencies will need to understand insurers’ and reinsurers’ COVID-19 exposures, so will their reinsurance counterparties.

Reinsurance agreements may not align with underlying coverage. The reinsurer’s indemnity obligations may be less or more restrictive than those of the ceding company. Effective communication regarding the scope and size of ceded COVID-19 exposures will enhance the dialogue between insurers and reinsurers, and aid the prompt submission and evaluation of the ceded claim. Effective communication can also reduce the cost, and distraction of potential disputes between cedents, and their reinsurers.

10. Capital management
Unexpected loss activity, poorly performing lines of business, and inefficient management of pre-COVID-19 legacy liabilities will combine to drain insurers of precious capital. Recent investment losses, and reduced turnover could compound this. It is therefore important to focus on restructuring mechanisms that would enable insurers to free trapped capital.

Standing out from the pack 
An insurer’s ability to keep on top of these challenges, both individually and collectively, will be a decisive factor in determining what companies emerge stronger from the crisis.

Rating agencies’ ability to assess these various issues in the round means that they are likely to be the key judges of who is doing well, and who isn’t. Rating agency assessments will in turn have a huge influence on shareholder, regulator, and policyholder sentiment.

Making the right decisions, and directing limited resources in the most effective way are clearly far from easy. Orchestration is critical in formulating the necessarily holistic assessment, and strategic response. People may need to be diverted internally, or brought in from outside, to manage the process. Get this right, and this is a chance to demonstrate the management effectiveness, and future viability of the enterprise.