In the wake of Covid-19, the demand for insurance payments to cover loss of life, health provision and business losses has been unprecedented. The ramifications worldwide are massive but in South Africa at least, insurance companies are doing the right thing, writes Mushtak Parker
Covid-19 impacts the insurance sector mainly through insurers’ investments and through claims. Insurance companies are providers of critical financial services that support activity in the real economy. They contribute to the flow of savings into investment and enable risk transfer by taking on the risks of households and corporates in return for a premium.
To the IMF, health insurers are likely to experience a significant number of claims related to Covid-19 but this will be mitigated by deferral of non-urgent medical procedures. “While it is difficult to quantify the impact at this stage,” stressed the IMF in a recent report on the coronavirus, “the standard view based on work on previous pandemics and disasters is that the impact on the liability side of the balance sheet for other insurers is likely to be limited. Many insurance supervisors have taken regulatory actions to ensure business continuity and flexible treatment of policyholders.”
The trends are already apparent. Lloyd’s of London has put its Covid-19 losses at $4.3bn, from an industry-wide estimate of $107bn, the worst on record. Factoring in investment losses, Lloyd’s predicts an overall insurance industry hit of $203bn.
Fitch Ratings on the other hand predicts the global reinsurance sector will fail to earn its cost of capital in 2020: “Financial performance will be hit by mortality claims and losses from event cancellation, business interruption, credit and surety insurance, and by financial market disruption linked to the economic impact of lockdown measures. This follows three years of heightened natural catastrophe losses and increasing claims, which depressed reinsurers’ returns in 2017-2019.”
Tropical cyclone Idai in 2019, which hit Mozambique, Malawi, Zimbabwe and South Africa for instance, was the costliest weather event ever in Africa, according to Swiss Re Institute, creating $3bn of economic losses but a mere $150m in insured losses. This indicates a massive 95% protection gap.
Down the line, premium rates are expected to be increased for both insurance and reinsurance, especially in light of the decline in business and low rate of investment returns due to the pandemic. Given that Covid-19 is a health-related condition, insurance claims for medical services, according to a World Bank estimate, could be as high as $90bn. This will depend on how long the pandemic drags on and any second wave of infections.
Insurance claims can be politically sensitive. While most insurance companies have pledged to treat claims fairly, a minority have already shown their intransigence by rejecting certain claims related to the pandemic – for travel, hospitality, small business losses, business continuity and employment losses.
The response of insurers to claims is vital. The Inter-African Conference on Insurance Markets (CIMA), for instance, in May reminded its members to provide coverage to policyholders infected by Covid-19, in accordance with principles of “fair treatment and protection of the insured” and that “claims should not be subject to any exclusion not provided for in the insurance contracts”.
In South Africa, according to the National Credit Regulator (NCR), responsible for the regulation of the South African credit industry, local insurers appear to be embracing Treating Customers Fairly (TCF) principles during the current Covid-19 pandemic even more than required by law under normal conditions.
“We have seen insurers encouraging people to claim under their policies, and reducing excesses if claims are made between April and June. Some insurers have extended financial assistance to their suppliers, especially those that are small to medium businesses and meet the turnover threshold of R2m a year,” explained Christine Rodrigues of local law firm Bowmans.
The NCR has also advised consumers to make use of their credit life insurance, to obtain some relief if they are unable to earn an income as a result of Covid-19.
Credit life cover is insurance that a consumer signs up for when applying for credit or a loan. It covers the outstanding debt in the event of unforeseen circumstances such as death, retrenchment, unemployment, inability to earn an income, disability and others. Many consumers may not be aware that they have credit life insurance in place. Insurance giant, Swiss Re has even opened access to its proprietary Life Guide underwriting manual to all life and health insurers for three months (from 27 April to 31 July 2020).
“These are unprecedented times and uncharted waters for life and health insurers, and we recognise the value of urgently sharing our expertise beyond our base of registered users,” said Paul Murray of Swiss Re.
So, what are the trends emerging as a result of the impact of Covid-19 on the insurance industry? According to Swiss Re, more people are likely to buy life insurance. At the corporate level, there will be a much greater move towards modelling and digitisation, especially in emerging markets, to capitalise on economies of scale.
South Africa remains by far the largest insurance market on the continent. According to the South African Reserve Bank (SARB), market share is dominated by the five largest entities – Sanlam, Old Mutual, Discovery Holdings, Liberty Holdings and MMI Holdings – which had a 74.4% market share in life insurance in 2019 and a 57.6% share in non-life insurance.
The total assets of life insurers in 2019 amounted to R3,121bn ($185bn), while for non-life insurers (travel, motor, property and casualty), the figure amounted to R154bn. This compared to total liabilities of R2,750bn and R84bn respectively.
Life insurance is clearly a solid business line with gross written premiums (GWP) totalling R530bn, resulting in R3bn in net profits. For non-life insurance the potential is huge, with GWP totalling R125bn in 2019 and operating profit totalling R16bn.
In contrast, the combined size of insurance assets across Ghana, Kenya, Nigeria and Rwanda was less than $10bn in 2016, which is smaller than the total assets owned by the South African industry.
In North Africa, the insurance penetration rate, according to the World Bank, is low – 3.68% for Morocco and 1.88% for Tunisia in 2018. In Egypt it was 0.66% for a population approaching 100m. Egypt is trying to catch up with the highest total premium growth rate of 32.4% in 2018, way ahead of the 3.85% for Morocco.
In Zimbabwe the industry has lobbied the Insurance & Pensions Commission (IPC) to reintroduce US-dollar underwriting of policies in a bid to restore the value of insurance and pension policies, market stability and customer demand.
The National Insurance Commission of Nigeria is similarly under pressure to extend its 31 December 2020 deadline for the recapitalisation of insurance companies. Companies that were on the verge of complying are now calling for the extension too, because they are uncertain about the impact of Covid-19 and the dramatic slump in crude oil prices on the economy.