Insurance in simple terms is a contract taken by individuals to hedge financial risks. An insurance company pools the clients’ risk in the form of premium collected and makes good the financial loss that occurred to a small number of clients during the specified time mentioned in the insurance policy. However, given the current scenario of the COVID-19 pandemic, some insurance industry segments may get negatively impacted in the short term as the small percentage of claims expected in this period may exponentially rise. However, the current fearful scenario may turn positive as well for the industry in some specific ways.
General impact on Insurance companies
The pandemic not only affected the new business growth of insurance companies but also has impacted the collection of premiums during the lockdown period. Besides, the insurance regulatory authority, IRDAI has given relaxations to the general and stand-alone health insurance policyholders. It extended the premium payment grace periods by 60 days that are due in March and April 2020. The regulatory authority has also mandated insurance companies to cover the clients during this extended grace period along with the new COVID cases irrespective of the health insurance policy that covers hospitalization expenses. These factors may lay an additional risk factor in terms of claim settlement for the unexpected rise in new COVID cases and the death toll arising out of this pandemic.
In terms of investments, the insurance industry may see a loss of value and reduced income due to larger mark-to-market losses and sharp markdowns as the markets witnessed huge corrections. The current instability or volatility in the markets might keep the investors away from buying fresh ULIPS and a significant portion of the existing investors might have already exited. Further, in regards to risk management used by the insurance companies, the current methods of risk projection may prove to be invalid given the current conditions. This could have implications on their accumulated reserves. The insurance companies may also need to liquidate the existing investments to obligate the excess claims if the pandemic situation worsens. Exiting from these investments may create further capital gains tax obligations or losses and increase the distress in the financial markets. The existing calculations of making the long-duration products may alter as there will be a variation in long term interest rates to mortality rates that were pre-existing to the pandemic. However, in the long term, the premiums may get revamped on the higher side based on the new mortality rates. As the COVID-19 situation subsides then, the insurers would reinvest in the markets with higher amounts than now but with proper hedge and contra strategies.
Impact on Life Insurance companies
Life insurers may need to take twin blows of portfolio risks as well as an increase in claims. This may result in an increase in premiums and the insurers may delay in issuing new policies or revamp them that offer complete coverage. However, there are some positive aspects as well in the current scenario for life insurance companies. Given the fear inculcated scenario of COVID, the demand for life insurance policies could rise effectively in the medium to longterm for protection and guaranteed products. With the recent changes in the direct taxes, under which the taxpayer has to forgo the existing tax exemptions for insurance, it is believed that the behavioral change in the customers could shift from seeing the insurance products as investment avenues to tools of protection at a relatively lower value which could surge the demand in the long term.
Impact on General Insurance companies
However, in the case of general insurers, it may turn positive for health insurers as they can bring versatile products such as disease-specific policies that may cover for testing and hospitalization expenses. This versatile product mix has already given rise to 14.4% YoY direct premium income for these insurers in the first two calendar months of 2020. On the other hand, the motor policies segment may see downside due to the slowdown in the auto sector. Similarly, the travel policy segment may also need to face difficulties for a medium-term until a cure for COVID is confidently found as the people may not travel in groups unless an emergency occurs. Apart from the above, general insurance companies are using this pandemic time to revamp the policies towards standard guidelines given by IRDAI in the last year. Even though there was ample time until September 30, 2020, the insurance companies may go with the new set of guidelines earlier to increase the premiums by 5% to 25% depending on the features added in the insurance products.
Considering the above facts, we can say that the insurance industry is currently at a cusp. Using the current opportunity of growing Fintech, the insurance companies may need to revamp their business models to online distribution models as they are largely dependant on offline distribution networks so far. The current conditions of pandemic effects may also change the way of thinking of the majority of Indians towards the complete coverage insurance policies as risk .0hedging tools instead of considering them as investment or tax-saving financial products. On the financial aspects, the insurance companies may relook into their risk management strategies which could see a surge in the premiums in the future. The current value loss in the portfolios may surge the demand for hedge products or safe-haven liquid assets in the future that could offset the value losses in the financial assets held by insurance companies.
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Grace Period For Renewal Of Motor, Health Policies Extended Till May 15. [online] @businessline. Available at: <https://www.thehindubusinessline.com/money-and-banking/grace-period-for-renewal-of-motor-health-policies-extended-till-may-15/article31362172.ece> [Accessed 29 June 2020].