Franklin D Roosevelt wisely said: “We cannot always build the future for the youth, but we can build our youth
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Insurers are measured by their ability to handle claims effectively during catastrophes and disruptions, as the COVID-19 pandemic continues to have a significant impact on society, businesses and the wider economy across the globe. The insurance industry has felt COVID-19’s impact through asset risks, capital market volatility, and weaker premium growth prospects, however, many have managed to respond quickly to the crisis.
It is expected that the majority of COVID-19-related losses, such as business interruption, will be picked up by reinsurers, decreasing the likelihood of primary insurer’s technical performance deteriorating materially, but increasing reinsurers’ credit risk on recoverables.
Many insurance companies have experienced an increase in claims related to workers’ compensation, health, life, travel and trade credit due to the pandemic, while the global economic downturn, low interest rates and declining capital markets have further impacted insurers’ investment income negatively. Interest rates have never before been this low at this point in an economic cycle and claims are expected to rise, leaving insurers balancing financial risk with reputational risk. The pandemic has required insurers to shift the way that they think about the valuation of their investments and liabilities. Market volatility and a possible decline in liquidity for certain products pose a challenge to price discovery and the valuation of hedges, investments or insurance liabilities, particularly with distressed or forced-liquidation sales. The differences between GAAP and hedge targets will likely widen.
Here, insurers will want to reassess the reliability and validity of valuation policies, models and controls to reflect the increased valuation risk or reduced price discovery. The ‘new normal’ is likely to be an environment with ultra-low interest rates, changes in downstream models, and volatility that requires reassessment in new market conditions.
As credit quality throughout the economy deteriorates, some insurers may need to address asset impairment and expected credit losses in their portfolios. Certain industries might need to determine whether market events have triggered an impairment charge based on revised forecasts. The ‘new normal’ is expected to bring a credit loss accounting standard, in which credit losses must be projected based on unpredictable events and outcomes.
Looking forward, firms may need to make additional provisions for adverse circumstances. Knowing what we know now, regulatory buffers, adequacy of stress scenarios, approval levels for large transactions and limits should be revisited. This may mean assessing whether the capacity for dividends from subsidiaries might fall, or revising trading limits and modifying “stress scenarios.”
Like many other industries, the insurance industry is vulnerable to a slowdown in economic growth, where access to capital markets may decline and the cost of capital increases. Insurers must evaluate a range of scenarios when drafting financial projections and capital needs. Major business transactions should be modelled to various ‘what-if’ test scenarios, and discretionary spending must be reviewed. Now is a good time to assess your short- and mid-term liquidity plans, and review the effectiveness of volatility-responsive fund strategies.
PWC reminds us that it is important to note that, although it is easy to lose sight of the big picture in a time of such global uncertainty, our modern financial systems are resilient and the damage caused by the pandemic is likely to be relatively contained. Businesses are urged to revert to their first principles to survive: What is your company’s purpose? What makes your company unique?
Find strength in the aspects that make your organisation special, and utilize these aspects to remain purpose-led. Companies must identify the opportunities for success that are presented in their relevant markets as they currently stand, and subsequently, redirect investment to ‘good’ costs and away from ‘bad’ costs, laying the groundwork for long-term growth.
Now that the immediate crisis has passed, we at Fulcrum have placed our focus on building a staffing and operating model that addresses the current business environment and can adapt to future crises. A hardening insurance market has welcomed rising premiums, reduced capacity and increasingly challenging underwriting conditions. Hence, our premium financing solutions assist businesses getting back onto their feet, offering crucial insurance coverage while freeing up the operational capital required to recover.
Contact us for a seamless and sustainable insurance financing solution today. After all, we are the best in the business.