Surviving the “Black Swan”: How COVID-19 will change the insurance sector

In March last year, one of the world’s largest VC's, Sequoia Capital, made headlines when it initially identified COVID-19 pandemic as a “Black Swan '' event. It’s not a phrase investors use lightly. It describes a surprise, freak event that could create substantial issues for businesses.

At the time, Sequoia’s prediction seemed to be on the money. Business activity slowed due to the virus, supply chains were disrupted, travel and meetings were indeed cancelled. In the months following, millions of lives were lost to the pandemic, trillions of debt was created to keep businesses afloat and despite this, thousands of businesses shut shop.?

But then, the world adapted. Work continued where it could, and the VC sector went on to have one of the strongest years on record. This was the case for several office-based industries who, despite initially fearing the worst of COVID-19, were able to keep operating remotely. The same cannot be said for the insurance sector.?

Over 18 months on, and in addition to the pandemic, we’ve gone on to witness bushfires, business collapses, mass protests, and even an earthquake.? We have experienced such a perfect storm of claim-worthy events, happening one after another with little break between. The sector amassed over $13 billion in debt as a result. Moreover, this is all happening during a period of disruption and innovation in insurance; one that promises to see the sector emerge both more resilient and tech-savvy.

Given the growing list of occurrences, “Black Swan” label seems apt when discussing the state of affairs with the insurance industry. So how have the events of the past 18 months changed the sector? And what can we expect it to look like going forward?

One of the key factors underpinning the insurance sector’s ability to weather COVID-19 and other events is the shift in claims made during the pandemic. Motoring claims are a good example of this. According to APRA, the ultimate loss ratio -- which measures the gross premium cost and gross claim payouts -- for both commercial and domestic car products fell below their 10-year average in 2020.

Meanwhile, household-related claims hit a new high, reaching an estimated 30 percentage points above their 10-year average ultimate loss ratio in 2020. This makes sense given everyone spent significantly more time at home in 2020 than any other year.?

Parts of the insurance sector did indeed take a hit. QBE and IAG both reported losses this year, while Suncorp and Allianz reported profits. All four cited challenging COVID-19 conditions, but due to their policy mix and target markets, some suffered more than others. But regardless, work on innovating continues at all four companies.?

The sector is currently preparing for further shifts in claims as we open up and prepare for our new COVID-normal. Insurers have put aside $1.5 billion for morbidity claims tied to COVID-19 lockdowns, as fewer Australians visit doctors for screening and fears grow about mental health deterioration. There are also expectations of liability claims relating to organisations and government bodies not doing enough to mitigate future outbreaks of COVID-19. Finally, we’re also expecting an increase in slips, falls and other liability claims as people return to retailers and other public places post COVID-19 restrictions.

The way in which consumers and businesses interact and choose insurance products is also likely to shift in the near future. We expect consumers to be more conservative as we leave the pandemic in the past. As a result, they will put more consideration into long-term insurance products such as health, life, and mortgage insurance. We also expect products that take into consideration the usage of the asset -- such as car insurance that factors in kilometers traveled -- to increase in popularity.?

Other sections of the insurance industry may also need to do some work to restore consumer confidence. Travel insurance is a good example, as stories abounded in 2020 regarding under-insured travelers stranded overseas. The same goes for certain loss-related insurance for businesses affected by the pandemic. Yet, few consumers and business owners realise just how regulated the insurance sector in Australia is. Insurers are obligated to process and pay claims in a timely manner should they meet the criteria of the policy.?

Technology and innovation in insurance will be fundamental in restoring this trust. Open insurance, and other data-driven innovations will transform the sector from a set-and-forget product into a service that engages with the consumer and dynamically varies its premium depending on the need of the customer.?

The COVID-19 pandemic has also accelerated consumers' expectations for tech-enabled self-service products. Nobody wants to be stuck on the phone with an insurance company or fill out endless forms and provide repeated information to an insurer to make a claim.?

There are innovations in the pipeline to remedy this. With the help of disruptors, I predict consumers will be seeing them within the next few years. It will be needed. If AXA’s latest report rings true, an increasing number of claim events triggered by escorting climate change will keep the industry on edge.

This drive to continue to innovate despite adversity is perhaps what is most remarkable about the Australian insurance industry. Insurance has undergone one of its more challenging periods in recent history. Other industries have slammed the breaks in response, and have focused on consolidation over innovation. The exact opposite has been happening in insurance.?

The sector has survived its Black Swan, and will thrive as a result of it.

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