Five long-term impacts of the coronacrisis… and three things to be positive about

“On the whole people are trading the business they would want to trade.” CEO of Lloyd’s John Neal.

· Regulations up for debate as pandemic disrupts normal service
· Economic conditions create rocky ride for M&A activity
· Value of tech and digital will become clearer during lockdown
· Industry resilience a key strength as virus generates system “stress points”

Optimism is rising on the back of government stimulus announcements but there is a long way to go yet, and as Lloyd’s chief executive John Neal said last week, COVID-19 means “our world and ways of working will change forever”.

Invitations to sign up for the 2020 Rendez-Vous in Monte Carlo this September were arriving in email inboxes as Intelligent Insurer went to press. It was a pleasant surprise to see the organisers optimistically keeping calm and carrying on given the COVID-19 outbreak truly went global only in March.

The World Health Organisation confirmed the outbreak as a pandemic on March 11, and many large events are already being postponed or cancelled, including the Tokyo Olympics due in July and August.

Of course, September is still months away and many are hoping the outbreak will have been brought under control well before then. With the announcement of huge government packages, such as the £330 billion support package for employers in the UK and the $2 trillion stimulus signed into law in the US, optimism is rising.

The threat to people, national economies and our current way of life is very serious, but the feeling that we can get through this together is beginning to take hold. As the famous UK World War 2 slogan says: ‘keep calm and carry on’, and we will get through this, together.

That said, fears of a ‘second wave’ of infections if precautions are lifted too early remain a serious consideration for governments. What is clear is that the implications of COVID-19 will have an effect on society and the global economy long after people are able to venture outside again.

Intelligent Insurer looks at five long-term impacts for re/insurers and three reasons to be positive.

LONG-TERM IMPACTS

1 The M&A landscape will look very different

Market uncertainty caused by the ‘coronacrisis’ can make mergers and acquisitions (M&A) an unattractive prospect. It is expected to delay or even kill some transactions and bring to life others that would otherwise never have been. If you’re prepared to take the risk, then times of uncertainty can also be perfect for making deals. Fortune favours the brave, apparently.

However, Ravi Arps, managing director at Stonybrook Capital, says: “I’ve been in discussions over the past few days and in light of the current environment, many are putting M&A discussions on hold. It’s not that they think their company is in trouble but there is a general unease and nervousness in the air.”

Buyers typically react quickly to market changes and they could lower their offers, and the crisis shows no signs of abating any time soon. On the other hand sellers, who are typically slower to respond, would likely want their original price, leading to discrepancies between the two players, Arps says.

Law firm White & Case has seen people taking a different approach. In a report published on March 10, 2020, it says dealmakers are planning to “lean into a downturn”, particularly if valuations come down as a result.

“Once dealmakers feel they can evaluate the market impact of the virus and the situation has stabilised, it’s likely that we’ll see renewed enthusiasm and M&A executives are likely to lean in,” says John Reiss, global head of M&A at White & Case.

Private equity investors are certainly not shy when faced with a challenging environment. Arps says rather than being deterred by the current economic landscape, private equity investors may now look to insurers more than ever as they offer a safer alternative to other industries.

One high profile M&A that could be delayed by the turmoil is that of brokers Aon and Willis Towers Watson. Both firms’ share prices have been falling since the deal announcement on March 9, but as one commentator says, that is in line with a wider market trend.

Stefan Holzberger, senior managing director and chief rating officer at AM Best Rating Services, says: “The economic and financial market conditions certainly do not make the road to completion any easier. That said, we would expect due diligence and regulatory submissions to progress—albeit at a slower pace as regulators’ priorities get pulled in a different direction.

“As with the Marsh/JLT deal in 2019 the combined entity might be determined to be anti-competitive. This would most likely lead to the divestiture of a piece of the business, rather than putting the entire deal at risk.”

2 Acceptance of technology will be cemented

What has been a relatively slow march toward greater use of technology in the sector may well get a nitro injection-like kick as many people are suddenly working from home and appraising the usefulness of better tech.

Even Lloyd’s, the more than 300-year-old market, closed its physical underwriting room in London EC3, forcing market participants to work remotely. Its emergency trading protocol clicked into action and data from the electronic trading platforms Placing Platform Limited (PPL) and DXC show that, so far, trading is continuing as normal.

Lloyd’s CEO John Neal acknowledges that “different people will have different experiences … but on the whole people are trading the business they would want to trade”.

Before the outbreak, PPL had already been described as “changing the mindset” of insurance professionals and in the last quarter of 2019 its use spiked significantly. It will clearly be of great help during lockdown and beyond, enabling brokers and insurers to quote and negotiate electronically as well as taking into account the use of other platforms such as Marketplace and MEL.

The experience of working under the threat of COVID-19 is likely to cement this shift towards greater acceptance of the need for technology. Neal confirmed at a briefing on the market’s 2019 results, that the pandemic has prompted the market to concentrate on tech and digital capabilities in its Future of Lloyd’s modernisation programme.

“Our Q2 2020 decision is to rationalise and narrow our focus into the areas that will make the most difference in 2020 and 2021,” he said.

That means Lloyd’s will continue with the next generation of PPL, continue putting the coverholder solution in place, continue its claims work, and make sure that the underlying framework is being put in place for data and technology, he said.

Q2 has a “heightened focus” Neal said, adding that the situation would be reviewed in Q3 and Q4.

Managing agency AEGIS London has moved all its underwriters to a digital insurance trading platform. Called Whitespace, the platform is recognised by Lloyd’s electronic trading. AEGIS says that its underwriters are able to transact business in all of the classes it writes using the system.

Insurtechs, more agile than larger firms by their usually smaller size, will also benefit overall in the longer term. One example that is already providing specific solutions for COVID-19 driven circumstances is Berlin-based insurtech wefox Group.

It has launched ‘wefoxGo’ as a direct response to help brokers working at home. It is designed to allow insurance brokers to connect their calendars to schedule meetings and conduct consultations via the platform’s video conference functionality, enabling them to communicate with their customers anywhere with a network connection. The tool has already seen a 200 percent rise in its take-up, its makers tell Intelligent Insurer, and they expect this to more than double as the crisis continues.

3 Vital nature of insurance acknowledged

The reputation of insurance will be greatly improved as people find the industry supportive and reassuring during the crisis. It was called “one of the nation’s essential services”, by David Sampson, president and CEO of the American Property Casualty Insurance Association (APCIA), adding weight to the adage “you learn who your friends are during a crisis”.

Sampson’s comments came as the APCIA warned American legislators not to force insurers to make retroactive insurance payments where cover does not exist, during a special COVID-19 session at the National Association of Insurance Commissioners (NAIC), on March 19, 2020.

Sampson said: “As one of the nation’s essential services, the insurance industry has vast experience with crisis management, and this enables property casualty insurers to respond to the increased demands presented by the national and global implications of COVID-19.

“We recognise that all of us—regulators, carriers, and the traders—are going through tremendous change as we revamp our operations, transition to remote working arrangements, and implement contingency and continuity plans to protect our employees from potential pandemic exposure.”

This work is happening as insurers respond to COVID-19 themselves, which is creating many system “stress points”, he told the meeting, adding that APCIA was committed to working with the NAIC and state regulators to ensure a smooth, successful and coordinated response.

Trust and confidence in the industry is also likely to rise as major industry players, including Talanx, Swiss Re and Lloyd’s have all stressed their resilience.

Lloyd’s £2.5 billion profit in 2019, improved combined ratio of 102.1 percent and a rise in gross written premiums to £35.9 billion, has put it in a strong position to respond to the impacts of COVID-19 and support its customers and business partners.

Swiss Re has been very open about its events cancellation cover exposure, including a $250 million exposure to the 2020 Tokyo Olympic Games.

The reinsurance group’s chief financial officer John Dacey says Swiss Re has “devolved a proprietary pandemic model to assess scenarios and enable active monitoring”, suggesting it is prepared for this crisis.

He emphasises that the firm’s own business remains resilient in the current environment. “We have long spoken about the depth and breadth of relationships with our reinsurance clients that is again serving us well as we continue and increasingly operate remotely.

“For example, our April 1 renewals focused on Japan are proceeding without any interruptions, our reinsurance revenues are secure and with proportional covers where primary companies premiums are below expectations, or may be below expectations, there may be some impact on our revenues but we are yet to see anything material,” he says.

Dacey adds that the main impact of COVID-19 on the insurance industry to date is “on the asset side of the balance sheet” and that Swiss Re had entered 2020 with an “extremely strong balance sheet overall and prudent positioning on asset risk”.

European insurance group Talanx, parent company of Hannover Re and HDI, is also confident about managing during, and beyond, the outbreak.

A spokesperson for the firm says the HDI Group continues to be “well capitalised” amid the coronavirus pandemic as of March 20, 2020.

“Based on our own competitor analysis, we would note that in a relative perspective we see ourselves well positioned to weather the recent market volatility, given our very low share in listed equities and a low share of bonds with a rating of ‘BBB’ or lower,” the spokesperson said.

4 Rules and regulations will be revised

With so many people in lockdown, doing business has become more complicated. To ease this situation and support the world economy as much as possible there is a strong lobby to fit rules and regulations more appropriately to the circumstances. Once in place it may be difficult to reverse such changes.

APCIA, for example, has urged US legislators to take account of the unprecedented conditions. Sampson has flagged up issues around flexibility for premium due dates, cancellation and non-renewal requirements, and other deadlines that will be disrupted by COVID-19.

He says the industry had received such requests from US states in the past and was starting to see similar requests now. He says consistency around such requests is needed and that the NAIC should support processes in line with prudent insurance principles and for those processes to be similar across states and across insurance lines.

For policyholders, he says: “Following many past disasters, where insurers have given policyholders forbearance to make late payments, the NAIC helped coordinate states to provide parallel accounting relief for insurers. Regulatory flexibility is needed for the accounting treatment for overdue premium receivables.”

He also suggests relaxing regulatory barriers to allow insurers to leverage new technologies. “It will be increasingly important that insurers are allowed to deploy new technologies such as drones, mobile applications, and telemedicine for workers’ compensation claims without running afoul of regulatory barriers.”

First-class mail delivery requirements could also be relaxed to enable better communications, and he proposes greater use of electronic delivery for all communications to customers, the NAIC, and state insurance departments.

“We encourage regulators to avoid implementing demands on the content of consumer communications. If there are necessary communications mandates, they must be uniform and flexible.

“We are urging states to be flexible in administering and enforcing statutory time restrictions related to claims handling, notification obligations, third-party administrator audits, and regulatory filings, for example,” Sampson says.

The Florida Office of Insurance Regulation has released a set of guidelines for insurers to follow during the coronacrisis. They provide greater leniency to policyholders in the light of complications caused by the crisis.

Insurers are being encouraged to be flexible with premium payments to avoid a lapse in coverage. This flexibility can include relaxing due dates, extending grace or reinstatement periods, waiving late fees and penalties and allowing payment plans.

They are also being encouraged to explore virtual options for underwriting and adjusting claims in lieu of in-person property inspections and for premium audits of employers’ records.

5 Access to and cost of capital will shift

The insurance industry has the largest proportion of its debt set to mature in the next five years of any industry in the US, second only to the auto industry, according to Arps and Stonybrook Capital CEO Joseph Scheerer.

They say that the decision of the US Federal Reserve to slash the interest rate to zero on March 15, 2020, may come as welcome news to companies looking to borrow or refinance debt. However, this good news is somewhat mitigated by the simultaneous increases in credit spreads, which have increased over 50 percent by some measures since news of COVID-19 started to sink in.

Increases in spreads tend to indicate a tightening of credit availability in addition to an increase in the cost of borrowing relative to “risk-free” Treasuries.

THREE REASONS TO BE POSITIVE

Amid the anxiety, disruption and rising cost in human lives, there are reasons for the industry to be positive. Intelligent Insurer outlines three that are worth considering.

1 Rebirth of pandemic reinsurance

Lloyd’s has re-floated the idea of pandemic reinsurance. Neal says the re/insurance industry is very good at looking at solutions that can work for new exposures and new risks such as COVID-19.

At the markets briefing on its 2019 annual results, on March 26, 2020, he revealed that Lloyd’s had written to the UK Treasury to set out all the examples of how insurers are responding to such risks around the world today, as well as insurers’ historic responses.

“I was reminded, through Munich Re and Marsh, that post-Ebola in 2014 they designed a brilliant product called pathogen RX, which was a pandemic insurance solution. No-one bought the cover,” Neal says.

“We have to make sure in a world where costs seem to be at the forefront of everybody’s minds that people do understand the benefits of some of the covers and why maybe they should buy them.”

Lloyd’s has volunteered its resources and capabilities to the UK government to help develop the solutions that will work now and in the future. One example is leveraging the administrative capability that Lloyd’s has to assess claims that would be made against the government as part of the packages it is offering to assist businesses and individuals.

“The response we’ve had from the government is that they’re appreciative of the connection we’ve made and would want to engage with us. We’ve volunteered to coordinate, so watch this space, I’m sure there will be some good ideas that will come from that,” says Neal.

2 Ratings downgrades will be limited

A robust capital position and limited exposure to loss-affected lines of business will enable most insurers to absorb the impact of financial market volatility and manage the marginal increase in claims, according to S&P Global Ratings.

However, the situation will exacerbate existing weaknesses, prompting S&P to expect some targeted downgrades or outlook changes over the coming weeks as it actively reviews its insurance ratings.

The agency says life insurers are more at risk, particularly those with relatively thin capital buffers and significant exposure to financial market volatility through their asset portfolios or product offerings.

On the bright side, S&P is maintaining stable outlooks for the life insurance sectors in North America and EMEA region, despite revising the outlook for the Asia-Pacific life insurance sector to negative.

The economic disruption associated with the pandemic, combined with the collapse in oil prices and resultant extreme volatility in the capital markets, will have severe implications for global credit markets, S&P says.

“That said, average rating across the industry is ‘A’, the highest average rating for any corporate or financial services industry we rate,” an agency spokesperson says.

“As with other investment-grade issuers, we don’t anticipate widespread downgrades across the industry.

“Nevertheless, some ratings will be affected. To date, we have downgraded one insurer and placed two insurance ratings on a negative outlook or CreditWatch. In each case, the implications of COVID-19 had compounded other factors, causing creditworthiness to deteriorate.”

3 Minimum impact on US premium income

In the US, the demand for many insurance policies is relatively inelastic due to corporate cultural norms or actual regulatory mandates (as in the case for auto insurance). Therefore, say Arps and Scheerer, it is not expected that the crisis will impact much of the industry from a top-line perspective.

Obviously, this does not apply to policies issued in relation to discretionary purchasing such as event insurance, they add. Nor does it apply to policies related to business activity directly affected by COVID-19 such as restaurants and bars, airlines, and commercial auto—all of which may be suppressed for some period.

But the longer-term prospects remain neutral which, given the expected arrival of a global recession, is something to be glad about.