Insurance, a trusted partner in changing times

However, a particular industry might just have had the push to stand out and effectively become a trusted partner during these challenging times.

In an interview, Anthony Dault, Audit and Advisory Partner for Insurance at PwC Luxembourg, explores how the global pandemic impacted the insurance industry, both in a European and in the Luxembourg context, and the next steps for the future.

Q - How did (and will) COVID-19 affect the insurance industry?

The general consensus is that it is still a bit too early to estimate what the cost of the outbreak to the global insurance industry might be, and although this period is generally named “post-COVID”, we are not there yet.

Policyholders and lawyers are going over insurance contracts with a fine-tooth comb, and insurers, in Luxembourg at least, are stepping up to the plate to act as true partners through this difficult time. Insurers, from the very early stages of the crisis had to show that there was business continuity, stability and also try to mitigate the impact on consumers, even as the industry suffers economic fall-out from the pandemic and its resulting restrictions on the way companies operate.

There are, I think, three particular areas of insurance that keep being heavily challenged by the pandemic: travel, business cover and life and health insurance. According to a recent article in the Financial Times, “Industry experts said a wide variety of polices could pay out, but that epidemics and pandemics were often deliberately excluded from cover.”

Given the scale of the COVID-19 outbreak and impact on households and (small) businesses, issues around exclusions have been given significant prominence in the media, often raising controversial aspects and highlighting areas where possible consumer detriment may exist. Here insurers are often in precarious positions. Even though pandemic risks can potentially affect the whole EEA and insurers operate in a single market, the COVID-19 crisis highlighted a heterogeneous landscape in relation to the treatment of pandemics, with differences ranging across markets, products and undertakings.

Anthony Dault / © PwC Luxembourg

In several markets, insurers exclude pandemics from their contracts, especially in the case of business interruption insurance, as physical damage did not occur. In a few markets, generally pandemics are not excluded from insurance policies, and finally, in some markets, ambiguity exists as to whether pandemics are clearly excluded. Therefore, this does make for a very clear situation for policyholders, and this explains to some extent why insurers may have had some mishap on the communication side, at least in the early stages.

The COVID-19 crisis highlighted some existing structural problems within the industry in that respect:

• There are issues around a lack of clarity in terms and conditions showing that in several instances, contracts remain complex and/or ambiguous and in some instances court interventions have been required / may be required;
• For some products insurance brokers extended coverage towards pandemics but insurers were not aware;
• A mismatch between consumers’ expectations and actual coverage may exist, indicating that more efforts need to be put on product oversight and governance (“POG”) and on assessing consumers’ demands and needs. For example, people expecting that their travel insurance products would cover pandemic circumstances;
• Product diversity, with often complex modular structures, raises questions as to whether there should be more standardisation and simplification.

The gathering economic slowdown emanating from the pandemic is also driving interest rates even lower and increasing credit risk exposures from businesses facing possible default. This raises the possibility of regulators asking for extraordinary solvency tests to ensure insurers can withstand the immediate and knock-on impacts.

Put together, this daunting list of issues represents a stern test of resilience for an industry already weighed down by enduringly low interest rates and slow growth in mature markets.

Beyond issues relating to existing exclusions, lack of clarity and contractual uncertainties, issues relating to changes in coverage also emerged:

• Some NCAs reported that since the ‘pandemic declaration’, some insurers have started to explicitly exclude pandemics from new contracts and/or at renewals;
• Other NCAs reported unilateral changes in terms and conditions by insurers to existing contracts;
• Finally, some stakeholders reported having observed changes in pre-screening questionnaires and demands and needs assessments aimed at excluding from health and life coverage possible risks relating to being infected with COVID-19.

Q - How are Europe’s insurers coping and mitigating the impact of the pandemic?

EIOPA (The European Insurance and Occupational Pensions Authority) recently published its Consumer Trends Report. It offers a snapshot of the impact of the COVID-19 crisis on the insurance and pension sector from a consumer protection perspective as of 30 June 2020.

The report confirms that despite initial concerns, insurers, insurance intermediaries and pension funds have worked hard to guarantee business continuity. Evidence from consumer interviews also confirms that business continuity has been ensured, rendering the process of buying products, submitting claims and complaints or asking information as ‘normal’ as possible.

The report also shows that the sudden shift towards digital channels has crystallised some benefits of financial innovation / digitalisation both for insurers and intermediaries as well as for consumers. However, in particular for more vulnerable and less digitally savvy consumers, intermediaries have also played a key role, being a first point of contact for consumers to seek guidance on their insurance coverage. Given the increased digitalisation, risks relating to increased fraud both against insurance undertakings, pension funds and against consumers, members and beneficiaries have also emerged.

Q - How has Luxembourg specifically responded to the COVID-19 aftermath?

On April, 23, 2020, The Luxembourg Insurance and Reinsurance Association's (ACA), published a press release to demonstrate the industry’s willingness to partner during COVID-19, stating that, “Despite the impact of the crisis on their activities, Luxembourg insurers and reinsurers show proof of solidarity and support the Luxembourg economy.” The release went on to confirm that the resulting health and economic crisis was already costing the insurance sector significantly but also stated that insurers need to remain mobilised alongside their policyholders, even remotely, and willing to play their societal role.

On the same day, ACA briefed the Ministry of Finance on the situation of insurance companies and Luxembourg reinsurance companies in the crisis. An inventory revealed that the sector was already strongly impacted from two angles: that of a very significant drop in turnover since confinement marked the virtual cessation of new contracts; and the fall of the financial markets resulting in a loss of value of their assets of around 15% compared to 12.31.2019.

Like other industries on which people rely, the insurance industry in Luxembourg had to quickly adapt to the situation in terms of business continuity while conforming to the sanitary measures and restrictions. In these efforts it showed itself to be very proactive. For example, allowing its customers access to agencies and insurance counters while teleworking remained the recommended option and modifying the offices and operations with protective measures - such as the installation of plexiglass walls or other health or distancing measures.

More recently, on 24 January, Pit Hentgen, the president of the LaLux insurance company, sat down for an interview with RTL, to discuss the different approaches to insurance policies in the face of the pandemic. The situation is rendered increasingly difficult by the fact that everyone is hit by the pandemic in some sort of way, and it remains clear that insurance companies will not be able to make up for all the losses.

However, Mr Hentgen emphasised that the solution might be for the insurance industry to continue working closely together with the country’s administration and find a feasible solution recognising that similar circumstances could occur again in the future.

Last but not least, the strong support in general of the Luxembourg insurance sector has to be noted through subscribing significantly to the State obligations intended to finance State aid in favour of the Luxembourg economy.

© PWC

Q - What’s next for the insurance industry?

Overall, the insurance sector has thus far overcome the pandemic without too many setbacks. Apart from home office, most restrictions have not really influenced the day-to-day operations conducted by insurance companies.

Insurers keep showing great resilience, effectively navigating industry challenges. But there’s also an opportunity for them to uplift the reputation and branding of the industry and demonstrate how they can help the community overcome this difficult period with no certain ending.

They can achieve that by assessing product offerings in light of changing risk profiles and business mix, reconsidering the role of technology and digitalisation and how to better use it for both internal processes and user experience; and adapting their current strategy and market position to prepare for a “post-COVID” world with:

• A realignment of cost structure and enhanced and sharpened productivity;
• A supercharged and boosted digital transformation;
• A carve out new revenue streams (via simpler and fitter products for example)
• A push to prepare the workforce for the new world;
• A need to optimise and strengthen capital efficiency;
• An enhancement of the societal role (i.e. purpose and reputation, which resonate very much in the current ESG and sustainable finance trend.

All in all this crisis will act as a catalyst for further changes in the industry. I personally believe the Luxembourg insurers will be up to the task, we have observed many existing projects in relation to the above dimensions, already running or about to, and that will further confirm the pace of the Luxembourg insurance sector as an EU Leader.