Covid-19: a 10-step guide to planning for insurers

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.

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. 

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. 

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. 

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.

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.

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.

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.

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.

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.