How The Insurance Industry is Navigating Downward Pressures During COVID-19
By Wynne Nowland, CEO of Bradley & Parker
The effects of the novel coronavirus pandemic have been reverberating around the business world since March of this year, when our personal and professional lives were unexpectedly altered. The insurance business was certainly no exception.
While insurance is not recession-proof, it is certainly recession-resistant. Most consumers and businesses can choose not to buy that new big screen TV or delivery van, but in most cases, it is nearly impossible for them to drop the insurance that protects them from financial loss. Even if they would be willing to take on a financial risk to save premium dollars, mortgages, loans, and business contracts almost always contain provisions that require them to maintain insurance coverage. Government mandates in many states for worker’s compensation and automobile insurance also mean dropping coverage is not feasible, no matter the hardship.
However, there are three “downward pressures” that can affect insurance businesses’ income during recessionary times. Where it is often impossible for customers to eliminate coverages, they can sometimes reduce the premiums they have to pay in areas like property limits, payrolls, and sales. Premiums are typically calculated by an exposure multiplied by a rate. If the exposures go down, the premium naturally follows suit. Many businesses that have been negatively impacted by the pandemic are consequently seeing lower exposures in the areas listed above and are requesting the appropriate reductions in premiums. Insurance carriers who are reluctant to accommodate these requests under normal circumstances are almost universally doing so now.
Another downward pressure affecting income, although likely temporarily, is caused by the various states that have suspended policy cancellations when insureds are suffering a financial hardship and cannot pay their premiums. Most of these suspensions are about to expire, and customers will eventually need to make up those payments.
Lastly, and certainly the worst kind of downward pressure on insurance income, is when a business is unable to survive and closes. Insurance is obviously no longer needed, and refunds will often be issued for the unused portion of the coverage. This pressure remains open-ended as businesses continue to adjust and evolve to meet the financial and operational repercussions of COVID-19.
The pandemic is impacting the industry in other ways, too. In mid-March, the governor of New York required companies throughout the state to have employees work from home. How quickly businesses were able to complete this transition was heavily dependent on how they functioned prior to the shutdown. Organizations that already had several partially or totally remote workers found the transition easier. For our organization, this was a matter of scaling up existing remote work programs so they could be used by the rest of the company. This transition also created an opportunity for teams to rise to the challenge and innovate the way they perform their jobs and service clients. Sales teams have had to be resilient. In the world of corporate insurance brokering, brokers almost always go to the customer. That has now, at least temporarily, been rendered impossible; sales teams have shifted to virtual meetings and presentations to win new business.
The industry is currently seeing a considerable amount of litigation and legislative action regarding insurance companies denying coverage for claims arising out of the pandemic. This is certainly not helping the typically negative public perception of the industry, but the situation is somewhat more complicated than that. Insurance rates and premiums are determined by actuaries who use decades of data to determine how much to charge in order to protect the customer’s company, while at the same time allowing the insurance company to make a reasonable profit. This pandemic was most certainly never anticipated in any of those calculations. Indeed, there have been several financial models that show the insurance industry would likely implode if they were compelled to pay the claims generated by COVID-19.
What does the future hold for the insurance industry? Looking at the past gives us a few clues. After the terrorist attacks on Sept. 11, 2001, the government instituted a terrorism coverage plan allowing businesses to buy coverage for future terrorist attacks, which is still in place today. Many in the industry foresee a pandemic-type coverage plan being created in the months ahead, as businesses look for ways to protect themselves from another event of this sort. Some insurors have also increased the base rates of different types of coverage to counteract some of the downward pressures mentioned above.
For now, it is important that the insurance industry focuses on navigating through these downward pressures to keep their business stable and healthy. Equally important, if not more so, is ensuring customers can remain stable as well. After all, their success and survival are paramount to the success and survival of the insurance industry.
Wynne Nowland is CEO of Bradley & Parker, a privately held insurance, risk management, and financial services firm celebrating over 80 years as a trusted advisor to more than 15,000 clients.