Six sides of the COVID crisis and my predictions on what they mean for insurers
At its very core, the art of insurance is about prediction. And with life insurance, we are often talking about predictions that can be 40 years out, or even longer. Every day actuaries and underwriters are called upon to make opinions. To draw lines in the sand, even when those very sands may still be shifting.
This tension between assessment and the unknown has never been more evident than this year 2020 — a year that's moved all of us from a place or relative stability to one of agonizing uncertainty. I believe the depth and projected duration of that uncertainty will be the most significant change agent for us as an industry.
Here is my personal take on six different aspects of the changes we're experiencing and how they might unwind in the future to affect life and health insurers.
Our own Swiss Re economists tell us to expect a downturn twice as bad as the global financial crisis. They are smart and well informed, but a prediction is a prediction. No one really knows for sure and debate continues on whether this will be flat or V shaped. Two things are certain – we know it will be prolonged, and we know there will come a recovery. While our industry has been closely tied to economic factors, changing consumer priorities may change our own industry's recovery trajectory which leads me to the next topic.
2. Consumer priorities
Consumer reaction and response is an interesting dynamic for our industry. Will their increased awareness of the need for financial protection change the recovery track for insurers? My prediction is yes. We are already seeing some signs of this in Asia where insurance volumes are recovering faster than the general economy. And consider this fact – we've seen an overall drop in insurance sales of roughly 20 to 40%. Yes it's significant. But look at the flip side – that means 60 to 80% of sales are still happening even in an industry that's still heavily dependent on agency-driven distribution.
3. Interest rates
The view on interest rates can be expressed in three words: Long and low. I see this issue as THE major megatrend in insurance for the coming years. Our products assume risks that are far longer duration than most every product sold today. Interest rates are a very meaningful component to our cost, our capital and our assumptions about what might (or might not) happen in the future.
Prolonged low interest rates change the view for not only for our balance sheets, but for the kinds of products we can offer. Today's growing uncertainties may change insurers' risk appetite for longer durations or require higher prices to offset such uncertainty. The open question for our industry is how do we address this very real financial constraint while still offering a mix of products that are appealing and relevant for consumers? It's a multi-billion-dollar question. Trend assumptions that drive economic balance sheets have never been so critical, as is the risk capital we allocate to the long-term risk.
COVID precautions and restrictions have meant that underwriters have had to adapt quickly, finding new ways to gather health information in the absence of physical interactions. This is accelerating trends we were already seeing in underwriting and trends we at Swiss Re were already working to help our insurance partners address. This includes looking for new ways to identify and understand risk using new forms of data and news ways to assess, automate and streamline the process.
We're introducing things like the Personal Resilience Score to make this more accessible for insurers and to make their products more accessible to more people. We've been building out our Magnum automated underwriting suite of solutions to make this easier for all insurers – those just looking to begin automation to those working on improving product design or continuously optimising processes.
There's no doubt COVID is accelerating this transition and increasing consumers' willingness to engage in digital channels. Our consumer survey in the US showed that 6% of people we talked to bought new insurance during the pandemic mostly mostly online with advice on the side. 37% said they would be more likely to buy online in the future.
Can you remember what life was like pre-COVID? We were already having conversations about mortality improvements going down and looking at alarming trends like opioid misuse and increasing suicide rates at younger ages. These trends haven't disappeared, they're just buried under a new layer of uncertainty as we await the second and third waves of the pandemic to unfurl and anxiously track the progress of various treatments, vaccines and long-term effects for survivors that remain to be discovered. Mortality improvement assumptions are of fundamental importance for any insurer assessing long-duration mortality risk. As are long-term trend assumptions for long-term health products like critical illness.
Throughout the pandemic we have carefully continued to assess and shape our guidelines to lead with a careful but informed and supportive approach that considers issues of accumulated risks, older ages, etc. We amended Life Guide quickly and were the first to share new underwriting guidance to help insurers navigate through uncertainty. We continue to adapt the industry's leading underwriting guidance as new information emerges, to ensure it's up to date with emerging data.
All of these issues lead to my final important challenge and an even larger moral question about the products we ultimately design and offer.
COVID-19 has exposed inequities. People in lower income brackets have fared worse. And lower income also means less ability to purchase insurance. Do our industry's products help people in all sectors of the economy? Have we leaned too far in servicing those with higher economic means who can understand and afford sophisticated products? What are the tradeoffs we can make in our products that address very real, underlying needs, and offer value that offsets an inability to take on the very long-term risks?
I would like to see our industry take this opportunity for a wake up call. It's time to seriously consider and act on the role we can (and should) play to drive a sustainable future that's in line with the United Nation's goals.
I confess. I'm an optimist. Transformation will create change. Change creates opportunity. And opportunity opens a new door to make an even larger difference for society and for the sustainability of each person, and each family. Together let's open that door wide and explore.