Insurance and the Coronavirus

Insurance is simple and slow moving

Insurance is a relatively simple business made complex by actuaries, regulation and product design. Like anything that is impacted by a fundamental change (as with money and bitcoin, for example), understanding it properly often requires going back to first principles. The famous origin story for insurance shows its simplicity. Lloyds Coffee House in London hosted meetings of ship owners who each agreed to put aside a sum of money, that any of them could draw on in the event that their ship sank. The concept is simple: we all save a little to protect ourselves against a low probability, high impact future event.

Across both life and general (short term) insurance, the principles are broadly similar. An insurance company collects premiums from clients. It pays out in claims payments when the insured event (e.g. a death or a car accident) occurs; it pays people to sell the policies; it pays employees to administer the business, and it keeps the money left over. In addition, there is a delay – on average – between collecting the premium and paying the associated claim, during which the insurer earns investment income from the funds it controls.

One of the characteristics of insurance is that it changes relatively slowly since the pool of money is filled up by regular monthly payments which tend to be ‘set and forget’. The things that impact the factors above – the number and productivity of the agents who sell, the death or accident rate, the employment of people, and the markets – are also subject to incremental changes over time. A single shock – perhaps a bad year in the markets – is absorbed by the robust insurers, and while it might impact on profits, it is just part of doing business.

The impact of Coronavirus

Then of course we get to Corona. The primary impact of the virus has come on three fronts: firstly, people started getting sick and then some of them dying from Covid-19. Secondly, markets around the world reacted by crashing dramatically as they priced in the anticipated economic shock of the virus. Third, national and regional governments implemented lock down measures of varying severity to try and control the spread of the virus. The different timing of the spike in death rates and the lock down rules has been a key factor in how countries have handled this: which has come first has been the difference between widely differing outcomes.

For each of these three impacts: the market crash, deaths, and lockdown; there are immediate and longer term results. In addition, for each of these primary impacts, there are secondary (and tertiary) impacts that are still playing out.

Insurers are in the unenviable position of finding that everything to do with the virus affects them. To articulate these things, with particular reference to South African insurers:

1. The market crash negatively impacts their investment income in the short term. The secondary effect is a flight to safety that has put the last nail in South Africa’s credit ratings and made the Rand weaker. This makes, for example, car parts more expensive and therefore puts up claims costs for a general insurer. In the longer term, the markets should recover, so normal service is resumed. Definite short term bad news, maybe long term it’s not so bad.
2. The lockdown and therefore inability of people to get to work makes it harder, and possibly more expensive, to operate the business, and triggers various business continuity reactions creating a short term loss of efficiency and capacity. This may perhaps be positive in the long term as the efficiencies of flexible working are discovered and retained.
3. The lockdown prevents face to face sales, reducing new premium income and removing the ability of sales staff to earn their commission based income. This lasts for as long as the lockdown lasts.
4. The lockdown prevents many clients from earning their income, particularly in the mass market where personal savings are lower, ability to work from home is less common, and people are more likely to be informally employed. This reduces the ability to spend on anything, and spending on insurance is more elastic than spending on food. The effects of this will be longer lasting than the lockdown as finances will take a while to recover at a family level in a parallel with the problems the macro economy will have.
5. Death rates in South Africa will decrease in the short term. This may seem counter-intuitive at first glance, but is a happy unintended consequence of the lockdown. Keeping cars off the roads and people out of pubs and shebeens has a positive effect on the death rate in a country with dangerous roads and a high murder rate. This is a rare piece of good news for South African insurers. Of course in the long term, we could be in trouble as death rates rocket – both from Covid-19 and from the deaths we won’t be able to prevent because the health system is over-loaded. So in the long term this is very bad news.

The complexity and interconnectedness of these factors demands a systemic thinking approach. If you do that, you might reach the cynical view that some of these things, especially for short term insurers, are self correcting problems. People aren’t buying cars or insurance during lockdown, but aren’t making claims because they are not driving either, so my premium income stays high, commission costs go down, and claims are low. As a life insurer, lockdown may delay deaths from Covid-19 to a point that comes after people have run out of money – because of lockdown – with which to pay their premiums. Put simply, when clients die, they won’t be insured any more, so insurers won’t have to pay claims.

This cynical view highlights another challenge to insurers, which is a moral one. They are in business to be the safety net for their clients. If they – albeit legally – do not fulfil that role now, when as a nation and a human race we are being vividly reminded of our inter-dependence, then the impact would be brand damaging at an industry level. Think of 2008 and the banks, except with people dying.

So what should insurers do?

Let’s look first at what they are doing already. Sanlam and Patrice Motsepe have pledged R1 billion to address the negative impacts of the lockdown, to slow the spread of the virus, and to save lives. This makes sense as a major role player in the SA economy, and as a life insurer. Santam has pledged R200 million to help their suppliers, employees earning variable commission, and the solidarity fund. This is a direct and short term fix for their immediate community and the broader SA. Old Mutual has given R10,000 in free life cover to South Africa’s 430,000 health workers until the end of the year. With a death rate of 9.3 per 1000 per annum in SA, I make the expected payout for 430,000 average South Africans to be about R30 million in a normal 9 months. In the light of Covid-19, we would obviously expect this to be higher, and the direct support for health workers is very positive.

A critical view of the above would say that Sanlam and Santam have not yet said what they will do for their clients, while Old Mutual have gone for a strong marketing message (“R40 billion of cover”). These are all great initiatives, though, and impressively quick responses from the industry leaders. I watch the space with interest to see what comes next. Here are some suggestions:

• Communicate with your clients via digital channels. Meet them where they are at with WhatsApp, video conferencing, and mobile interaction. Make those interactions free wherever possible;
• Remember that, right now, everything is about Corona. Along with every conversation we have, every advertisement and communication is filtered through the lens of this virus. Please do not try and sell me something I can’t buy, don’t need and can’t afford right now;
• Use your reach and brand to support Coronavirus efforts directly by being a source of trusted information and advice. Insurers are always low on engagement – here’s a chance to change that and build a stronger relationship with clients;
• Consider taking a voluntary hit to secure your clients long term loyalty – perhaps reduced premiums for a time, perhaps an extended premium holiday so they are secure;
• Work with your clients to find out what they would like – perhaps a choice between a loan against future premiums or a premium holiday, or open ended suspension of premiums against reducing cover. Get creative with ideas and communicate them;
• Don’t waste the crisis – embed more flexible ways of working for staff – using efficient digital tools, reducing overall costs long term and giving access to a bigger potential talent pool of part time or remote workers once your model allows for it. A portion of your staff can be remote;
• Help your clients to be more aware of digital channels for sales and servicing, getting them to accelerate the change in their behaviour so it sticks longer term.

There are many more, but the key thing is to think systemically, and think about second order effects. As an example, look again at Old Mutual’s initiative – not picking on them, but it’s simpler and easier to use as an example. They have created a positive relationship and goodwill with 430,000 health workers, plus all the other potential clients who have been encouraged by this idea. On the other hand, they have removed the need for those people to pay premiums to insurers for cover they no longer need, potentially increasing lapse rates for insurers across the board.

In a world that has become increasingly populist and divided over the last few years, the Coronavirus crisis feels like someone has pressed the reset button. A disease that hits everyone, regardless of race, income, religion or whatever has the potential to bring out the humanity in all of us. Insurers are uniquely placed to take a lead role in responding to this challenge.