COVID-19: what the insurance industry needs to do now

 Sarah Kocianski photo
Sarah Kocianski Head of Competitor Strategy
5min read

In part one of this series I pointed out that things look very, very bad for the insurance industry right now. In this blog post I will explore what might happen next.

For better or worse this will be a shock to the industry that forces significant change.

In the short term, many individuals who previously took little to no interest in any form of insurance that wasn’t mandatory will start to reassess what insurance is and what it’s for. Businesses will take a closer look at their coverage and have questions for their brokers that the latter are ill equipped to answer.

The insurance industry will be forced to respond to these short-term concerns, but also to react and to ensure that in the longer term it’s better prepared to survive such events which are unlikely to decrease in volume and severity.

What should the insurance industry do now?

Speed up rethinking products and services offered

Customers will seek policies that protect them from risks associated with global pandemics and climate change. Large insurance broker Marsh has offered infectious disease cover via a product called PathogenRX since 2018. Until now take up was limited as the product was viewed as expensive given the risk. Demand is now spiking, and the company estimates that it could be worth as much as $1.5 billion in premium income a year. That will likely spur the rest of the industry into developing similar products. Indeed Munich Re is working to encourage insurance businesses into doing just that.

It’s also possible that regulators will consider introducing new rules on capital reserves as a result of COVID-19

Accept that older products will increasingly be seen as no longer fit for purpose

The race to the bottom in terms of price has resulted in many business policies, particularly those for SMEs, that simply offer inadequate coverage. The pandemic will speed up the understanding of this situation among many buyers, even while their understanding of the need for insurance grows. Insurers should be self-aware enough to realise that, and act accordingly.

Rethink business models and core principles

COVID-19 is having a huge impact on the global economy which is unlikely to recover quickly. At the most basic level, that will mean insurers need to think about how they make money — which, arguably, they should have been doing so since 2008. It’s also possible that regulators will consider introducing new rules on capital reserves as a result of COVID-19, which will further accelerate the need for a rethink.

Focus on the human who is buying the product

Whether that is an individual, an SME owner or an employee at a large firm. Individuals, SME owners and sometimes even corporate insurance buyers struggle to understand under what circumstances a policy will actually pay out. That’s due to contracts and terms and conditions that are almost always long, in too small a font and use jargon that the average lay person doesn’t understand. This is a relatively simple thing to fix and would go a long way to helping insurers rehabilitate their reputations with customers.

There are many insurtechs that can help insurance companies wanting to build resilience

Reassess how risk is calculated

To do all of the above insurance companies will need to take a long hard look at how they define and measure risk. While each type of insurance business, and indeed each individual firm, will have its own interpretation, at an industry-wide level changes will need to happen. That means more data, that are increasingly widely available, should be taken into account when modelling risk. That could, and should, include factors such as climate change.

How can insurtech help?

There are many insurtechs that can help insurance companies wanting to build resilience to future pandemics, including parametric insurance providers that use new and alternative sources of data, and insurtechs that help companies better access, understand and use either data they already have or new sources of data. One company already helping firms better understand data is which has developed an algorithm to speed up the detection of COVID-19.

There are even some insurtechs whose sole purpose is to help the insurance industry (and others) produce better risk models for epidemics and pandemics. Metabiota is one — it has a giant database covering historic and emerging outbreaks that it uses to create models which apply social, political and environmental data to epidemiological data. Those models are then used to underwrite cover that both protects customers and makes business sense for the insurers.

Policies based on Metabiota and similar firms’ models are being seriously tested for the first time amid the current outbreak. Next, there should be a great deal of analysis done on how successful they are for both the insurer and the customer, as well as the wider data that are generated from COVID-19. That should offer greater insight into whether it’s realistic to expect the development of viable policies to cover pandemics.

More such businesses will appear in the next year or so. What must be hoped is that at a combination of these insurtechs, and the current situation will accelerate the reassessment of the fundamentals of insurance by the industry as a whole, and that the result will be positive change that results in products and services that offer greater protection for individuals and businesses alike in the future.

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