The Impact of the Pandemic on Insurance Companies

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.

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.

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 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.”

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.