Q and A with the experts: COVID-19 and the insurance industry

The COVID-19 pandemic has affected almost every aspect of life in Canada – and that includes the insurance we pay.

Tony Wirjanto, a curator for Insurance and Asset Management for the World Economic Forum and professor at the School of Accounting and Finance, as well as the Department of Statistics & Actuarial Science at Waterloo, takes us through how COVID-19 has affected the insurance industry, and what can be done about it.

How has COVID-19 affected the insurance industry in Canada?

The insurance industry in Canada was projected to experience a compound annual growth rate of 4.1 per cent between 2020 and 2024. This has been revised to 1.7 per cent in the wake of COVID-19.

The impacts of COVID-19 creates three challenges: rising claims, business continuity, and eroding capital reserves. There is an increase in life and health insurance claims. To support policyholders on claims and coverages, insurers offer grace periods on premiums, extend eligibility and coverage periods to customers, and relax underwriting requirements to expedite and encourage new policy issuance.

In maintaining business continuity, the sector encounters challenges from operational and back-of-office perspectives, and faces impediment in transitioning workforces and critical functions to a virtual work environment. Mergers and acquisitions are also affected by the pandemic. The pandemic creates a capital and liquidity problem on several fronts. On the asset side, brokers struggle to bring on board new proposals as clients cut their spending.  On the liability side, payouts rise over claims, increasing outflows. On the investment side, the low interest rate environment reduces investment returns in a volatile market.

What do industry changes mean for consumers?

In the wake of COVID-19, insurance companies are making an effort to increase their online communication with customers. Some products are becoming out of step with reality, however, and no longer meet the needs of customers. What good is a health coverage if it only pays for a surgery that is suspended? Is travel insurance worth buying if a disruption like COVID-19 is not included in the coverage?  In addition, there is an increase demand in products, such as disability and life insurance, and hospital indemnity, critical illness and/or business disruption policies with a broader coverage. Income protection and other savings and retirement products that offer income certainty such as annuities are in demand as well. Home coverage is more valued given the amount of time that customers have to spend in their homes if working from home remains a viable option for them.

Is there a role for the government to play in helping the industry recover from COVID-19?

At a high level of engagement, government can respond to COVID-19 by taking concrete steps in support of promotion of continuity of operations; management of solvency and liquidity risks; and policyholders that have been adversely affected by the COVID-19 public health emergency.  

With regard to the solvency issue, Canada’s OSFI has introduced measures to ease some regulatory policies to reduce the operational burden. Other measures that governments can take would be to provide (re)insurance or financial guarantees to support the availability of insurance coverage for certain losses that are either becoming far too difficult to cover due to the impacts of the crisis, or are traditionally not covered by private insurance markets. The first measure is in the form of trade credit insurance and aims at providing insurance companies with coverage against payment defaults demanded by commercial customers. The second measure addresses a longer-term issue associated with the lack of insurance coverage for pandemic-related business interruption losses.

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