Articles - Covid19 and a 10 step guide to planning for insurers

 By Wan Hsien Heah FIA CERA, Principal and Consultant at Barnett Waddingham

  

 Covid-19 and the need for a change of plan 

 For insurance firms heavily impacted by Covid-19, it isn’t too dramatic to say that the current year’s business plan needs to be put aside and an entire re-planning exercise take place from the ground up.

  

 Each department will need to assess how Covid-19 will impact their numbers. For example, the underwriters will need to reassess how premium volumes will be affected for the business underwritten and the terms and conditions offered. Meanwhile, actuaries will need to reassess their loss ratios in light of changes in exposure. These could be positive (!) although this is very much dependent on the insurer’s specific situation.

  

 The plan then needs to be reviewed frequently to determine its ongoing validity. This applies equally to asset management and investment strategies, given the volatility in asset values. Speed is of the essence here. It is critical that your firm’s processes and systems will allow you to refresh your views with optimal efficiency.

  

 Here are 10 areas to consider when planning in a pandemic. 

  

 1. Consider the indirect impacts of your planning
 All aspects of the business plan should be reassessed, including secondary impacts. For example, a reduction in volume means that allocation of fixed expenses per policy will increase and therefore the technical price. This may itself trigger a feedback loop on planned volumes and the cycle repeats until some kind of equilibrium is achieved. These dependencies can be hard to identify and, as such, a collaborative effort is required.

  

 2. How well do you know your insurance firm’s business?
 A number of products in the market are either highly dependent on cross-subsidies or are packaged products that cover a range of perils. A reduction in one product that is highly dependent on subsidies from another may result in a change in business mix and consequently performance.

  

 Similarly, for packaged products, one of the many perils covered may be heavily impacted by Covid-19 and will need to be accounted for appropriately.  

  

 3. Can we rely on the past to predict the future?
 One of the things that the pandemic has taught us is that historical data is no longer a good predictor of the short-term future.

  

 For actuaries, what this means is that projected loss ratio performance must detach from historical performance, where a shock due to Covid-19 is expected. This may seem frightening to actuaries but, in reality, they have the training to exercise their expert judgement when it comes to adjusting the projected performance.

  

 Consider other datasets or even proxies available outside of the insurer to form a view. For example, loss performance on medical products could be correlated with the level of Covid-19 cases reported in the exposure country. There are a number of Covid-19 prediction models out there that could be used to determine exposure and therefore provide a glimpse of a possible future for your firm’s performance.

  

 Furthermore, at the time of writing a significant number of countries are past the first wave; this in itself brings with it rich, valuable and actionable data to help with planning.

  

 4. Test, test and test again
 Insurers’ performance will be highly variable, given the number of economic variables which themselves are uncertain. Scenario testing, and sensitivity analysis of business plans will provide valuable insight into what alternative outcomes might look like.

  

 There needs to be an understanding about how sensitive assumptions are to things like disposable income, general economic activity and even the performance of your competitors. This will help you understand and put in place mitigation should those outcomes fall outside of your firm’s risk appetite.  

  

 5. Change with the market
 The demand for insurance has, without a doubt, changed. It is therefore important to recognise where this will impact and to take strategic measures to either pull back from less profitable classes and push more into classes with higher demand.

  

 This may well mean entering a new line of business altogether, bearing in mind that the impact of the pandemic could well last a number of months, if not years, making a strategic change a real option.

  

 6. Factor in customer behaviour
 Softer factors like customer perception towards insurance is changing with every headline. Some insurers have already predicted a reduction in renewal rates for a range of insurance policies. As an example, should competitor actions cause a class action lawsuit on business interruption claims, then you may need to plan to either restrict your firm’s cover or project losses, depending on what position you take on the matter.

  

 You may also be a need to provision additional funds to support vulnerable customers or increase provisions on lapses as customers experience the impacts of the pandemic. 

  

 7. Be realistic when business planning
 It is important to remember that it will take time to fully experience any action taken by management now. For example, rate increases will take time to work its way through as contracts are bound and renewed, since they are unlikely to affect existing contracts. The full impact of the rate increases will only be felt a year from now, if that.

  

 Such delays following implementation of management action must be carefully analysed and understood to avoid creating an optimistic business plan. What should also be considered is how quickly mitigating actions can be put in place and such delays factored into the business plan. 

  

 8. Crowdsource the plan
 All parts of the organisation must buy into the plan for it to be successful. It is important that feedback loops are in place and that all information available, however sparse, is considered and factored into the plan.

  

 The more people look at the plan, the more likely it is for someone to identify a deficiency or limitation of the plan. Management can then take further action armed with that knowledge. More importantly, management needs to understand the feedback to avoid putting forward an unachievable plan. 

  

 9. Remember, cash is king
 Liquidity risk remains a highly relevant risk, given the large amounts of pay-outs that some insurers may face. Most business plan processes focus on the balance sheet (for capital purposes) and income statement (for profit purposes) but few focus on the cashflows and timings thereof.

  

 Cashflow projections are vital to helping treasury and investment teams understand how liquid the asset portfolio needs to be to avoid cashflow problems whilst ensuring that assets can be realised at as optimal a price as they can, given the circumstances. 

  

 10. Don’t cut into the bone unnecessarily
 It would be tempting for insurers to (and indeed many have) cut expenses during these times. Yes, combined ratios will spike. Yes, cutting expenses will help defend against thinning margins – and indeed this has been the way for many since the 2008 financial crisis. Whilst tempting, taking even further cuts due to Covid-19 might present operational risks, which could reduce the viability of the business plan.

  

 Furthermore, the reductions may themselves be unrealistic, which could lead to worse than expected performance at the end of the year. Care must be taken to ensure that any reduction or freezing of expenses remains appropriate and that Covid-19 is not used as a blunt tool to reduce the cost base.  

  

 Planning is everything!
 All that said, even though you’ve come up with a plan or are developing one, remember that “plans are nothing, planning is everything”. Once you’ve got a plan and a holistic view of the trajectory, repeat the process. Keep planning and keep reviewing and refining. It is the motions of going through that process that will enable you to get through this with confidence.