Before we talk about how insurers are being affected by insurance companies and COVID-19. Let's first talk about the basic concept of insurance and reinsurance as it relates to money and finance.
Insurance is a tool or method of transferring or distributing both natural and financial risks to reduce financial loss or hardship. This contract between the insured and an insurance provider pools certain risks and funds while stipulating events which the insured can claim for losses.
The insured then pay a premium into the fund. These pooled premiums are invested in low risk and liquid investments to grow and maintain the funds as claims are being paid out. These companies are also required to maintain a regulated reserve fund. This is to ensure there are significant funds to pay claims over a short period in an event of a major event.
Insurance companies are at risk of financial loss if claims are higher than anticipated or rates of returns lower than projected. If these conditions are short-lived, they can often be offset by an increase in annual premiums or tighter underwriting criteria.
Reinsurance is based on the same principles as above. One insurance company is the client or insured and another insurance company holds the policy.
Take Florida, for example. The risk of having numerous claims arising from a hurricane is quite large compared to other inland states. For this reason, many insurance companies may purchase reinsurance to help cover claims if these losses arise.
Like regular insurance mentioned above, reinsurance funds are also invested and have the same regulations for reserve funds to protect against higher numbers of claims. In the case of COVID-19, the increased claims and falling financial markets are just the tip of the iceberg for these insurance companies.
Why are the risks for insurance companies and COVID-19 claims different from other events?
Unlike past crises or world events, this pandemic has affected every type of insurance imaginable, all at the same time. From health, travel and business, to credit, home and auto. There is an unprecedented number of claims coming in all at once. The pandemic and lockdown are not something that could have been planned or reinsured against.
Usually, when there's a crisis, it affects one or two types of insurances and has some commonality of claims. As an example, if there were a massive wind storm that swept through a province, you would expect home and auto claims to go up. It would be unlikely, however, that travel, credit or business insurance would be affected in any meaningful way. Unfortunately, this is just the starting point for concern:
The loss of new business and decreased sales volume is another added concern. The lockdown has caused issues with the industry's standard delivery method, which is face-to-face sales. Fewer people working or receiving income during this pandemic is another issue working against the sales side of the business. Traditionally, there is very little correlation between claims and new policy sales, as seen with COVID-19.
2. Claims and Customer Service
The massive volume of claims and customer inquiries companies are experiencing is also troublesome. There has been a surge in customers reaching out due to confusion about how issues directly related to the pandemic are covered. Customers want to know what's covered, who's covered, and how to make their claims.
Volatile financial markets, overall economic uncertainty and low-interest rates are further affecting both insurance and reinsurance companies. This makes paying claims from all lines extremely taxing to their reserves.
How does this affect you, the Insured Client?
For starters, there have been long wait times, slow claims payouts, and a general lack of clarity as to what's covered and what's not covered. With a reduced workforce, increased claims and empty offices, the frustration and confusion around who to talk to is growing.
When people are affected in their own businesses with credit default risk, job losses, and business closures, this magnifies the issue. With both an economic and health crisis going on at the same time, people are in desperate need of money and funds. In a situation where you've had a loss or claim, you expect your insurance company to pay out in a timely manner. In a time when people are losing their livelihood and fearing for their family's health, claim confusion and payment delays can be a hard pill to swallow, regardless of fault.
What are the possible long term effects of the COVID-19 pandemic?
The list of long term effects is hard to predict at this stage. With falling and unstable financial markets, low-interest rates and unknown economic recovery timelines. Insurance companies have a lot to work through in the coming months.
We would all agree that the pressure to move to an online and digital delivery model is not unique to the insurance industry. The pressure to protect both consumers and company employees from COVID-19 is mounting, leading to the possibility that the insurance industry could look very different in the near future.
As we move to online and digital purchases, consumers need to make sure they clearly understand the products they are purchasing. Regardless of how the industry changes or where you purchase your insurance policies moving forward, the importance of working with a professional adviser who you can trust will always remain constant.