Industry must be wary of COVID tail

Stefan Holzberger Chief Ratings Officer for AM Best explains there is much for the (re)insurance industry to consider in the year ahead.

As a new year begins, it may be tempting to leave 2020 and its defining event, COVID-19, in the rearview mirror. However, the global pandemic highlighted three key areas that AM Best hopes the insurance industry will stay focused on in 2021—risk management, innovation and public-private partnerships.

It is important that insurers and reinsurers stay vigilant in their enterprise risk management and guard against the optimistic feeling that we have rounded the corner on COVID-19. With financial markets stable, if not strong, it might appear the worst of the global pandemic is behind us. We hope it is. But let’s not to assume we’re completely out of the woods in terms of the potential for a financial crisis to stem from COVID-19. There very well may be a lag effect. So we would like to see the industry maintain a level of capital strength and liquidity that will prepare it for another economic downturn like we saw in the second quarter of 2020.

We also would encourage (re)insurers to be on the lookout for emerging loss trends related to COVID-19, particularly in casualty lines. As a credit rating agency, what keeps us up at night are the unforeseen events and conditions that can change the credit quality of an insurance company quickly. Drops in risk-adjusted capital and sharp increases in underwriting losses are two of the primary causes of downgrades.

In terms of innovation and technology, we expect (re)insurers to use these tools to improve customer experience, enhance analytics and rethink product offerings. The loss of face-to-face transactions this year illustrated the importance of having a good online presence. Customers want and expect a seamless digital experience. On the back end, (re)insurers should be leveraging predictive analytics to better understand and underwrite their books of business.

At a higher level, (re)insurers have an opportunity to reimagine their operating model and product offerings. The pandemic forced companies to operate remotely. For insurers, whose brick-and-mortar business model has always been expensive, shifting to a remote workforce presents a cost-savings opportunity. From a product standpoint, this is a good time to identify demographic trends, such as the increase in gig economy workers, and alter insurance products to ensure they’re appropriate for consumers.

Lastly, we would like to see the industry as a whole engage with policymakers and legislators to guard against future pandemics. There is not a pure insurance solution for this problem. It requires a public-private partnership. (Re)insurers, as managers of risk, are well positioned to have a seat at the table. It is our hope that the insurance industry help legislators and policymakers find a solution for this risk, so that we don’t find ourselves in this position again.

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