By: Sudheer Krishnankutty, Senior Consultant, Insurance Consulting Group, LTI

What started as health crisis has, in a short span of time, snowballed into a financial turmoil. The world is fighting hard to contain and control COVID-19 outbreak and its unprecedented social and economic consequences for businesses, consumers and communities. With global economy witnessing a meltdown, it’s a tough time for Life Insurers trying to navigate through the crisis. They are faced with challenges like:

• The volatility of financial markets will negatively impact the investment earnings, its quality, and the product portfolio of the insurer.
• The number of deaths due to the pandemic will be high, which will severely impact the claims outgo. If the insurer anticipates excess mortality, then it needs to assess the effect of pandemic on mortality tables & resultant premium, along with financial implication.
• Negative interest rates will weigh heavily on the life insurers. Many insurers have already been recalibrating their product portfolio to address exposure to historically low interest rates. Additional adjustments of this sort may be required.
• Increased regulatory scrutiny will be a new reality as the regulators need to watch the financial soundness and interest of the policy holders in the context of economic & capital stress faced by Life Insurers.
• While profitability will be under pressure, “mark-to-market” losses could affect the solvency of some insurers requiring fresh infusion of capital.
• Life Insurers can expect an increase in lapsation and the applications for loans & surrenders on the existing policies due to the need for immediate liquidity on account of lockdowns & layoffs currently.

How to mitigate the current crisis associated with pandemic?

Life insurers should primarily create a list of potential levers which would help them to mitigate the cost and risk. They should investigate these levers and apply them effectively based on their needs and strategic perspective.

If the strategic view of the insurer is that, the crisis is a short term and temporary disruption. In the recovery phase, there will be potential levers like grace period extension, premium holidays, loans for policies with cash value, short term premium financing (based on creditworthiness), reduction in the face amount for a specific period of time and may be deferment/reduced dividend to policy holder.

However, if the Life insurer can anticipate that the disruption is long term and prolonged, then the insurer might be forced to increase the cost of insurance, but at the same time, balance the mortality spike and PR impact. Other options like reviewing the need for more reinsurance and revised underwriting guidelines for new policies could be applied. Also looking at educating their customers and providing good medical care for those affected, would cost cheaper than the cost of excess claim. Insurers can reinvent themselves by innovating their product portfolio with capital- efficient products, coupled with flexibility of convenience, and modernizing their distribution channel with digital tools & support.

Conclusion
In this unprecedented new normal thrust upon us by the pandemic, the Life Insurers who can apply these potential levers efficiently and reinvent themselves with an innovative approach based on their needs and strategic orientation, will be better positioned for successfully handling the pandemic and emerging as a leader.