Did Insurance Companies Benefit From COVID-19?

Lewis Carroll – author of Alice's Adventures in Wonderland – once wrote, “every story has a moral you just need to be clever enough to find it.”

For instance, the COVID-19 pandemic has taught us that things can always take an unexpected turn. But how can one protect against this kind of event? One of the options would be to purchase some sort of insurance policy.

Of course, it won’t prevent the unexpected from happening; however, if the inevitable occurs, you will receive some sort of payouts, such as covering funeral expenses, death grants, etc. No surprise, the worsening of the epidemiological situation across the globe has triggered a spike in the number of life policies sold last year.

To be more precise, Northwestern Mutual, the largest seller of life insurance last year in the US, registered a 15% jump in the number of life insurance policies it sold between April and September, versus the same time last year. AccuQuote, an online insurance marketplace, on the other hand, has seen its policy sales grow about 30% because of the pandemic.

The question then should be asked – does it mean that the insurance industry was able to benefit from the coronavirus crisis? Unfortunately for the companies, together with an increase in sales, also surged payouts on policies. It is estimated that the non-life insurance industry has received over 1 million COVID-related claims in the first quarter of the current fiscal year, higher than in the entire FY21. In this context, it shouldn’t be a surprise that the vast majority of companies from the sector lost in value.

More precisely, the average market capitalization of publicly-traded life and health insurance companies in the U.S. decreased by 13.4% in 2020. EBITDA multiples also dipped in the first quarter of 2020 as the market reacted to the economic fallout of the COVID‑19 pandemic and recovered throughout the remainder of the year.

A study suggests that lower interest rates also had repercussions for life insurance companies, as they are particularly sensitive to long-term interest rates. The net effect on balance sheets will depend on the asset duration compared to the liability duration. Life insurers typically have liabilities that are longer in duration than the assets available in markets. Hence the net effect of a long-term reduction in interest rates on balance sheets is likely to be negative.

In the case of companies providing contingency, travel, and event cancellation policies, things went even worse. Just one reinsurer has estimated an event cancellation exposure of €500 million. Now, imagine the number of travel insurance policies activated and the scale of event cancellations and postponements – from the Tokyo Olympics to weddings. It is the same story with marine and cargo insurers. Similar to the case of marine hull and cargo, the aviation industry and its insurers face challenges from decreased demand and changing exposures. 

Companies providing general liability insurance also suffered an important hit. Long story short, businesses that continued operating until lockdown faced claims for infecting customers with COVID-19. As a result, insurance companies were forced to increase their policy premiums. The only problem is that such an increase may lead to customer drop-outs. For that reason, insurers have to be pragmatic about the share of cost increase they want to pass onto the customers without shrinking the overall demand substantially.

What is going to happen next?

Despite recent recovery, the long-term impacts of the pandemic remain uncertain and insurance companies face many changes and challenges. To recover the momentum, insurers will have to deploy new technologies to reinvent their core for mitigating both short- and long-term impacts of the pandemic. Looking forward, industry revenue is expected to increase over the next 5 years as premium prices are expected to rise. Similarly, interest rates are expected to rise, increasing expected portfolio returns.