With the challenges facing individuals and businesses right now, the insurance industry is needed more, not less, so how the sector adapts to the changes brought on by COVID-19 is going to define the industry over the long-term. In light of this, Rivera focused on what financial items insurance organizations need to focus on as they plan for a post-COVID world.
“Shareholder equity is the starting point for any insurance company’s strength, [so it’s] very important to try to minimize tangible or intangible asset impairment,” she explained. “The good news is the insurance industry generally limits the amount of risk assets that they participate in and have minimal exposure to equities.”
She also pointed out that any reinsurance recoverables that insurers have are with good rate and hopefully with well-rated reinsurers, and that they’re collecting that reinsurance in a timely manner.
“The largest liability on the balance sheet is the reserve position and, in a post-COVID world, the good news is with the accelerating rate environment, we should be able to have much better loss ratios moving forward, which is going to strengthen our reserve position,” said Rivera. “But we are still facing, as an industry, social inflation trends and then obviously we need to pick up any COVID losses that we are faced with.”
Some of those losses may come later than expected. Rivera separated the direct losses from COVID that Tokio Marine HCC experienced, which is where the event specifically created loss payments, primarily in lines like event cancelation, business interruption, evacuation, medical insurance, travel, and medical stop loss, from indirect losses that will take more time to make themselves known. These second losses will be the result of the economic recession that has followed the coronavirus crisis, and could take two to four years to be fully realized.
“We have some specialty lines where we see increased losses potentially when we go into an economic recession,” said Rivera. “Those would be losses [in lines] like credit and surety, D&O, professional liability, and cyber. Then, we also have product lines that have premium reductions that are going to result in lower profit potential – medical stop loss because it’s related to census data, warranty and indemnity insurance because merger and acquisition activity has stopped for a while, and then all of the aviation and travel-related products because people aren’t traveling.”
There are likewise lines that will see partial impact, such as crop insurance. Rivera explained that losses under that line of business are impacted because of commodity price fluctuations, and lowered demand since, for instance, students aren’t in school and they don’t need to buy cartons of milk. As a result, Tokio Marine HCC is warning its employee base that the economic recession could have an impact on financials this year, as well as the following year. Rivera recommends that other insurers have a similar expectation, and account for the potential long-term impact of COVID-19 in their financial analyses, midterm plans, and budgeting.
When it comes to insurers’ debt and liquidity positions, organizations also need to ensure that they have average adequate coverage ratios and liquidity to pay claims, and, on the capital management side, considering that many insurance companies have had their capital base stressed due to COVID-19, insurers should make sure that they have the flexibility to be able to absorb that stress and maintain rating agency confidence. The bottom line, though, is that insurers should consider whether they have the appropriate risk tolerances in place and if they’re comfortable with their risks moving forward.
“I do think it is time for the industry to think about bolstering their balance sheets to ensure financial stability,” noted Rivera, “but it’s also an opportunity to build a better and stronger balance sheet going forward and evaluate your enterprise risk management framework to make sure that you are prepared for the next big systemic event similar to COVID-19, if it were to arise.”