“NAVIGATING INSURANCE DURING PANDEMIC AGAINST ALL ODDS”

The world has faced and witnessed the worst ever pandemic in the history of mankind which was never heard or observed in such a global magnitude of humanitarian disaster & terrible crisis so far. The Covid-19 pandemic jolted the world economy and triggered the largest global economic crisis in more than a century.

Global economic outlook growth projections according to the recent world bank data estimate an expected deceleration from 5.5% compared in 2021 to 4.1% in 2022 and 3.2% consequently in 2023. The economic impact of covid-19 can be visibly augmented by the fact that there is an acute rebound in global activities together with supply disruptions, and higher food, and energy prices which has accelerated significant inflation across many countries currently, which should be terrifying for the world being driven towards a massive global recession.

While we were still struggling to recover from this major catastrophe, the war in Ukraine has further destabilized and fueled the reeling economies of the world which has a severe negative impact on the global economic recovery while economic damage from the conflict is adding to a significant slowdown in global growth in 2022 and beyond.

Moreover, a deep economic contraction is also projected for Russia due to the sanctions levied on them besides the European Union’s decisions to scale back energy imports from Russia. However, there has been a joint effort to respond to the humanitarian crisis in Ukraine to prevent further economic destruction while trying to retain the global liquidity, and debt distress, tackle climate change and ultimately end the pandemic. Likewise, the ongoing economic crunch and civil unrest in Sri Lanka are also adding fuel to the current crisis, which is an interchange of the inherited problems due to the economic mismanagement by successive corrupt governments in Sri Lanka with their flawed economic disparity. This pandemic is still not contained by most nations and food prices have increased rapidly, hitting vulnerable populations, especially in low-income countries. Apart from the Covid-19 pandemic, severe natural disasters and climate-related events are also derailing the recovery process, particularly in emerging markets and developing economies. Global cooperation is necessary to accelerate the progress towards meeting the Paris Agreement on Climate Change goals and to reduce the economic, health, and social costs of climate change which will increase green investments and eventually facilitate a green energy transition for the world.

If we speak about the economic recovery and impact on the insurance industry this pandemic has posed a sudden and unexpected shock to the industry. As the pandemic continues, it’s having an enduring economic impact on the insurance industry, similar to so many other industries at large. Insurance companies saw severe losses in key industry areas, driving multibillion underwriting losses, shoving extensive job losses, and eroding capital reserves of insurers & reinsurers, while pushing towards bankruptcies, and severely affecting small business premium earnings as companies in retail, food service, and personal services struggle to recover or shut their doors forever.

Oil price is increasing rapidly, casting a gloom over the economy, driving up inflation, and eroding consumer confidence while the estimate is that high oil prices is going to be for a while. The world is in the grip of an oil price shock, where in just a few months, prices have risen from US$65 a barrel to over $130, causing fuel costs to surge, inflationary pressure to rise and consumer tempers to flare. Even before Russia’s invasion of Ukraine, prices were climbing rapidly because of soaring demand and limited supply growth. The biggest oil producer in the world is still the United States of America and Russia is the third-largest oil producer in the world, supplying 10.5 million barrels per day, or 11% of the world’s supply after Saudi Arabia. Even though as of date despite sanctions being imposed on Russia, Russian oil hasn’t been banned by western buyers yet, Russian banks have been cut off from the rest of the world, and it’s not clear how oil will make its way from Russia to Europe. Still if Russia isn’t completely cut off, even a minor disruption of 11% of the world’s oil supply is a very big deal and is a gap that can’t be filled immediately. The biggest problem is that investors like pension funds, insurers, and banks aren’t investing in oil like they used to do, and as a result, there’s no increase in supply on the horizon. Today, multiple factors are raising oil prices besides these key elements. Oil demand has grown more rapidly than expected in recent months as countries emerged from pandemic lockdowns. There has been always a loose partnership between OPEC and Russia, which has not raised production at a commensurate level, and neither have U.S. shale oil companies. Although, countries have drawn on stocks of oil and fuel to fill the supply gap, reducing this emergency cushion to low levels. Due to the backdrop of the Russian invasion of Ukraine, oil companies got the excuse of expecting a potential for sanctions on Russian oil and gas exports to increase the energy prices higher. While, oil prices affect companies in many sectors well beyond the oil industry. The latest increase in crude oil prices and the effect on consumers has been severe due to the looming threat of the world being pushed towards a greater financial and economic depression. With the Economic Instability endangering the world being not stable this will have negative effects on all insurance companies. This may bring about an increase in premiums paid by customers, just like interest rates on credit facilities provided by financial institutions. The challenges faced by the insurers ranges from economic hurdles such as the potential for sustained inflation; to sustainability concerns including climate risk, diversity, and financial inclusion; to rapidly evolving consumer product and purchase preferences.

The covid-19 pandemic has had an enormous impact on the global insurance industry insurers reacting to the long-term effects of the pandemic while continuing to advance further into the future of digital insurance. Insurers will have to make efforts to restore customers’ faith in the industry, as well as minimize customer losses in the wake of premium rises. The insurance industry is undergoing a digital transformation that will no doubt be ongoing for some years. The InsurTech industry is growing every year, with statistics from McKinsey showing that InsurTech funding has increased year-on-year consistently since 2017, reaching an estimated high of €8.7 billion in 2021. Adapting to new technologies and achieving net-zero are the key issues with the shifting geopolitical insurance landscape. Technology continues to be of the utmost importance to insurers in 2022 & beyond, building on the rapid digital transformation seen post covid, which offers insurers solutions to meet their ESG goals.

It’s a general notion that insurance firms are companies set up to cancel the ripple effect of unforeseen circumstances. Against many odds, most people still believe that insurance firms will be viable and popular in societies. However, this is not the case as we still have many insurance businesses facing difficult challenges that deeply threaten their survival and existence. Insurance companies are ever ready to bear your risk because we live in a very unpredictable society with varieties of daily risks. Today, every business changes in some way, and the changes can either be negative or positive. It is a fact that in every industry, there are various problems to be faced insurance is not an exception. Despite lingering concerns about COVID-19 variants, most insurers expect an accelerating economic recovery and additional digital technology investments in 2022.

The COVID-19 is not only challenging the way we live on a daily basis but also posing significant short and long-term economic threats that could have a lasting effect on personal financial well-being. Employees are unprepared for an extended economic downturn or recession: Many employees are already in a fragile financial state and unprepared for short-term cash needs, lacking the ability to absorb even a minor shock. In fact, more than one-third of full-time employed Millennials, Gen Xers, and Baby Boomers, have less than USD1,000 saved to deal with unexpected expenses. Financial problems are the top cause of stress and a major distraction at work. Changes in the economy may also exacerbate existing issues, including those forced to withdraw retirement funds prior to retirement.

Improving cyber security and reducing cyber risk is another top priority of every insurance company. Though we all know that cyber risk is not only pertaining to the insurance industry alone, but the industry is considered “behind” when compared to the banking or some other financial sector.

The other major concern for the insurance industry after the pandemic is eroding capital of these companies. Insurance companies run a delicate business while guaranteeing to make payments for their policyholders to cover damages that the policyholder may experience. Hence, with the failing capital adequacy ratio tests insurance companies are not viable with their financial position to meet their obligations. All insurance companies are required to comply with solvency margin requirements of the regulator as prescribed by their respective regulators in various demography which indicates current as well as potential underwriting capacity through an analysis of a firm’s Operating Leverage. The risk of heightened volatility in the financial markets, therefore, remains significant for these insurers.

The financial and economic challenges brought forth by COVID-19 will continue to impact consumers and businesses, potentially leading to profitability impacts for insurance carriers down the road. Consumers and businesses expect insurers to have a greater understanding of their individualized needs in light of shifting behaviors and preferences. Insurance digitization efforts will continue to strengthen as digital adoption in the insurance industry grew 20% globally in the past year. Consumer preferences for interacting via digital/online platforms also support this trend.

Weak profitability is likely to leave more reinsurers worldwide vulnerable to takeover in 2023 & beyond encouraging mergers and acquisition activity. The worst-hit reinsurers are likely to be smaller, less diversified, and operating in markets where premiums have fallen to the point where they are barely covering the cost of capital. But the good news is that the Middle East and North Africa (MENA) region remains an attractive growth prospect for reinsurers due to its underlying market growth and low penetration rates, despite persistent challenging conditions. Although, a number of recently established reinsurers in the MENA region have had to exit the market due to the ongoing challenges of pricing pressure, overcapacity, and unusually large catastrophe losses etc.

Undoubtedly, the current crisis is a challenge for the industry, but as a confident professional, my personal opinion is that amid the COVID-19 pandemic, the opportunities & possibilities are substantial for our insurance industry. With the world slowly getting back to a new normal, the insurance and reinsurance industries have an opportunity to secure positive growth in order to rebuild and reshape the industry. Demand for insurance grew on the back of greater awareness driven by COVID-19 concerns, but it also drove people to look more closely at coverage details and to take a more cautious approach in decision making. We are likely to see a hybrid purchasing mode, where consumers continue to trust reliable, accessible, and knowledgeable insurance agents while seeking online options.

With the advent of increased cyber fraud, cyber insurance is emerging as one of the biggest organic growth opportunities for property and casualty insurers. It is projected that cyber insurance will grow to US$20 to 25billion according to a report by Deloitte. While the pandemic persists, insurers must learn to give up-to-date and accurate information to their clients; they must be proactive rather than reactive in their response and be prepared at all times for worst-case scenarios. They must continue to relate with clients in a positive working environment to maintain their trust.

The current insurance sector is a combination of business and technology themes, and most of them are likely to become conventional in the future. As technology and advancement are becoming added on, the sector is swift in the stir of challenges and opportunities. These challenges and opportunities include continuous increasing customer demands, major compliance requirements, an increase in digital devices, improved connectivity, and complex digital fraud.

Also, the sector is disrupted by InsurTechs that are evolving with redefining the offerings and distribution with their digital mode operations. This advanced offering lowers operational costs, faster speed to innovation, and brings new and relevant offers to the customer faster. The insurance sector is now in an era where every modern change where it is related to Business or technology becomes an opportunity and challenge at the same time.

As a practitioner of insurance and as a broker or advisor or consultant to policyholders it is an opportunity to demonstrate our value at a time when policy holders are distressed and looking for a piece of professional advice to survive in these turbulent times. I accept the insurance industry hasn’t been as deeply scarred by the ongoing crisis as compared to other financial institutions. But that doesn’t tell the whole story. Let me tell you that the insurance industry may be critically misunderstood by its customers, and worse, customers lack confidence in insurers and at best see buying insurance as a necessary evil; but not now as we all have realized that this is the industry one that can add value to everyone’s lives. Hence, this is a time to learn and understand how and why things can go wrong and work collectively to put that right.