Advocacy Talking Points 16 June 2020
The Impact of the Pandemic on Insurance Companies
Assessing Insurance Companies in Turbulent TimesWatch the Webinar
When problems arise, it is natural to assume that insurance companies will be affected, too. As such, the pandemic’s effect on the sector has been a topic of interest, which is why CFA Institute hosted a webinar titled “Assessing Insurance Companies in Turbulent Times.”
The event featured a panel of experts who looked beyond Covid’s impact to explore trends like global interest rates, tighter regulatory regimes, and rapid digitalisation. It was a multifaceted analysis of where the insurance industry is now and where it is going — something investors should find particularly useful. The panellists were as follows:
- Stratos Pourzitakis, PhD, Director, Society Advocacy Engagement, CFA Institute, (Moderator)
- Eunice Chu, Former Head of Policy of ACCA Hong Kong SAR
- Charles Chui, CFA, Board of Director, Hong Kong Society of Financial Analysts
- Jennifer Law, former MD, Equity Research at Haitong International Securities
- Mike Goodall, Chief Commercial Officer, Transamerica Life (Bermuda) Ltd.
Eunice kicked things off with a broad overview of the industry to establish context for the audience. She also presented a high-level summary of a framework that investors can use to assess insurance companies. The full framework can be found here.
Two Key Characteristics of the Insurance Industry
The first characteristic is best described with the euphemism “cash cows.” Because of the sheer amount of cash they receive from premiums, insurance companies must be able to effectively invest this money, which is also known as "float." As such, their investment returns directly affect their performance.
The second characteristic is a lengthy operational cycle. Whether this involves acquiring new customers or paying out claims, the various industry processes traditionally have been highly time consuming. This second characteristic, however, is being upended by technological forces that are reshaping the sector. For example, it is enabling the following:
- More targeted customer acquisition
- Automated claims handling
- The use of big data analytics for more accurate underwriting (which also enhances profitability)
The effect of digitalisation frequently came up throughout the webinar, especially with the pandemic having accelerated its pace. Of course, digitalisation was occurring before Covid, and it would not be the first thing that comes to mind when thinking about its impact. More typical worries would be things like claims payouts and loss of sales.
But as Jennifer puts it, these are just “small, short-term challenges.” She continues, “Insurance is about pricing and risk management — if risk is properly priced, claims payouts are never a big issue for insurers.” Instead, one of the most enduring challenges the insurance industry faces as a direct result of the pandemic is the low-yield environment.
The Effect of the Persistent Low-Yield Environment
SInce the 2008 global financial crisis, global interest rates had been broadly low. To combat the economic shock of 2020, monetary policies became ultra-loose. This has made yields on bonds fall drastically, which poses a problem for insurers because fixed income represents the bulk of their underlying portfolios.
Charles notes that this has “forced insurance companies to look beyond traditional asset classes, and even into private assets such as private debt and equity.” Additionally, Jennifer sees Chinese insurers increasing their allocations to high-dividend equities.
This low-yield environment has affected the high-net-worth (HNW) segment, which primarily uses insurance as a succession planning tool. Charles observes that their primary product set used to be universal life insurance because an arbitrage existed between the cost of funding said product and the benefits of investment returns, policy cover, and liquidity advantages. With returns on the underlying portfolios decreasing in tandem with fixed-income yields, that arbitrage opportunity has largely disappeared.
As a result, he notes that universal life insurance “has fallen from about 80% to 90% of HNW’s insurance products to under 33%.” The pandemic has altered these HNWs’ attitudes — they have become more conservative, seeking greater guarantees. Flow thus has shifted to whole-life insurance.
Dealing with Asset-Liability Mismatches
Insurers must match the tenure of their assets (their underlying investment portfolio) with that of their liabilities (their policies, which could result in claims payouts). For life insurers, in particular, their policies have decades-long tenures, meaning they ideally should find investment assets with similar tenures.
The problem is that long-dated fixed-income assets are increasingly hard to come by — even before the pandemic, and particularly in Asia. Jennifer states that “the dearth of long-dated bonds in China was a bottleneck constraining the growth of the insurance industry there.” She also points out that as insurers increasingly diversify away from traditional fixed-income assets, this also adds more strain from an asset-liability matching perspective.
A bright spot was highlighted — that is, compared with the global financial crisis, insurers’ balance sheets are now far more robust. Plus, the various regulators have tightened their solvency governance regimes, helping mitigate overall risk. The acceleration of digitalisation also has served to help propel the industry forward in a turbulent environment.
Digitalisation: An Enabler for a Volatile Environment
Digitalisation is synonymous with disruption, so it would not be a surprise if it also created industry-level challenges. Although the panellists agreed that it is indeed resulting in increased competition — particularly from internet-based insurers — they were unanimous in it being an enabler rather than a disruptor.
For instance, Mike points out that the closing of cross-border travel had effectively shut down a lot of business in the HNW segment, where affairs are complex and often require multiple face-to-face meetings. While this complexity has traditionally made the segment resistant to digitalisation, amended regulations by hubs like Singapore and Hong Kong SAR has allowed business to continue virtually. He also notes that, although this segment has a complex setup portion, digitalisation has made post-setup self-service much easier — spanning things like managing claims and checking policy values.
Digitalisation has been a significant growth driver for the low-cost segment, especially with the pandemic raising awareness of the need to obtain insurance. In China, Jennifer notes that this has created opportunities for internet insurers and mutual aid providers that operate a lower-cost distribution model. During the lockdown, many of these companies attracted strong user flow by providing pandemic news updates and health advice, which then could be monetised through insurance product sales.
Charles concurs, referencing how digitalisation is helping close China’s health protection gap, which, at about US$900 billion, is the largest in Asia. While the shift to digital used to be centred around making middle- and back-office functions more efficient, its current applications help insurers target and deliver low-cost solutions to a mass-market segment. Product innovation, such as insurers partnering with fitness-tracking wearable device companies to promote a healthy lifestyle, also is advancing.
Such front-end benefits are being seen for the HNW segment as well. Charles notes that “digitalisation is enhancing their traditional sales channels, providing simple and effective support from key activities ranging from sales and servicing to KYC [know your customer] and financial needs analysis.”
Growing Opportunities for Insurers
Panellists were optimistic about the future of the insurance industry, especially in Asia. They pointed toward its demographics and strong domestic demand as well as its low penetration and socio-welfare coverage as key structural support factors. The most significant source of long-term growth is likely coming from the countries that are seeing an emerging middle class.
In the smaller but more lucrative HNW segment, Mike observes that more than half of family-owned business in the region have yet to implement a clear succession plan — despite owning about 85% of all companies. More insurers might gravitate toward this segment, especially as encroachment by internet insurers forces a shift by traditional insurers toward a higher value-add model, similar to private banks.
About the Author(s)
Eunice is responsible for elevating ACCA’s brand equity through stakeholders’ engagement, speaking in forums and training events, conducting research projects, article contribution and media commentaries. Eunice is the co-author of the "Sector Analysis: A Framework for Investors" research series jointly published by CFA Institute and ACCA. Besides her research work, Eunice also assists ACCA’s advocacy and educational work, giving presentation and training sessions on financial reporting, corporate governance and professional ethics issues in Hong Kong, Vietnam and Cambodia.
Mr. Charles Chui, CFA, is a seasoned investment professional with 20 years of experience in the private banking and wealth management business; with qualifications as both CFA and CPWP charter holders. He has exposure to major international European investment bank and Swiss private banking business, with major functions in overseeing the North Asian (including Japan) economics and capital market asset allocation decision. Charles is currently the Head of Investment Advisory in a top bracket mainland Chinese bank based in Hong Kong, with the mandate to enhancing investment returns of high net worth individuals and family offices while at the same time optimizing their overall portfolio’s risk and return profile.
Jennifer has more than 10 years of research experience on the insurance & non-bank financials sector for Asia ex-Japan, previously with Bank of America Merrill Lynch, Daiwa Capital Markets and Standard Chartered Bank. Prior to joining Haitong International, Jennifer was the Head of Financials Equity Research and the Head of Product Management & Research Marketing at BOCI. Jennifer has been voted as one of the Top 10 analysts for the insurance sector (Asia/ China) in multiple investor polls for years. She was also awarded the 1st runner-up in the 2014 HKSFA Best Research Report Competition. Jennifer holds a BA degree (dual major in Accounting & Law) from the University of Manchester and a BBA degree (dual major in Finance & Economics) from the Hong Kong University of Science & Technology.
Mike joined Transamerica Life (Bermuda) Limited. (Transamerica Life Bermuda) as its Chief Commercial Officer in April 2017.
Mike is responsible for all Sales & Distribution, and Marketing functions across Transamerica Life Bermuda’s Hong Kong, Singapore and Bermuda branch offices.
With over 30 years of experience in the banking and insurance industry, Mike has held various senior positions and portfolios across bancassurance, distribution operations and strategic business development in Asia and Australia.
Most recently, Mike served as Head of Insurance at Citibank Australia, where he was responsible for managing Citibank’s life, credit and P&C insurance business. Prior to this, Mike was Chief Distribution Officer at MetLife Australia, following his role as Regional Head of Bank Distribution in Asia. He has also held regional executive roles at Sun Life and Standard Chartered Bank.
Since 2015, Mike has served as Managing Director of the Self-Managed Independent Superannuation Funds Association, Australia’s first advocate association that liaises between fund trustees, industry authorities and the community on policy and legislation.
He also contributes to Self Managed Super, a Benchmark Media trade publication providing comprehensive editorial content to advisers servicing clients with self-managed superannuation funds.
Mike attended the University of New South Wales. He holds a Diploma of Financial Planning and is a graduate of the Australian Institute of Company Directors.
Stratos is the Director, Society Advocacy Engagement APAC at CFA Institute. He leads CFA Institute efforts to engage APAC societies in conducting advocacy initiatives in their local markets. In parallel, he offers training and support to CFA societies in the APAC region to engage in advocacy outreach with local stakeholders.
Previously, he worked as head of research at Asian Private Banker, he was a part-time lecturer at Hong Kong Baptist University, and he worked for more than five years at the Greek Ministry of Finance. He is also the vice-chairman of the Financial Services Business Council of the European Chamber of Commerce in Hong Kong.
Stratos holds a PhD in Government and International Studies from Hong Kong Baptist University, a Master of International Public Policy from Osaka University, and Bachelor in Accounting and Finance. He speaks, English, Greek, Japanese, and some Putonghua and French.