British Insurers Provisioning More with Increase in Covid- 19 Death Payouts

Summary

• Most insurers have witnessed increased payouts on deaths being attributed to the coronavirus pandemic
• There has been an increase in the businesses of the insurers as people are rushing in to buy life insurance, income protection and illness cover in the wake of the increased levels of risk perception
• Increasing business activity levels in the industry is also prompting most insurers to rapidly bring back their employees who had been furloughed

Any natural disaster is generally a very difficult period for an insurance company if they have been providing cover against it. In the case of the COVID- 19 pandemics the situations are no less demanding for the British insurance companies. Their businesses which have seen an increased payout on account of claims of families of patients who died because of the coronavirus pandemic are also now forced to make more provisions in this regard given the uncertainty on how long it is going to take for the country to contain the pandemic. Within the industry, however, the activity levels of different segments have been varying significantly. While the sale of pension products in the industry fell significantly because of the pandemic related economic uncertainty, the sales of protection products have increased substantially, helping many of the insurance companies to bring back their employees from furlough at an accelerated level to deal with the increased demand.

How are insurance companies dealing with increasing losses and business activity?

It is a strange dilemma for the insurance companies these days that they are suffering losses on account of higher claim outgo, and yet there is an increased business activity in the sector forcing them to expand their operations. Insurance companies have increased their provisioning for the forthcoming periods ensuring that their profitability will be low for the coming year as well. The protection products, however, will now attract enhanced premiums as the threat levels have gone up, giving the insurers enough reason to rework their calculations, but the potential liability for people already insured will remain high. The pandemic till now has infected nearly 311,641 people in the United Kingdom out of which more than 46,500 have already succumbed to it. The number of people, thus who would now be seeking protection on the life and income protection will go up significantly. With the speculations that the people who have contacted the disease and survived could face enhanced health complications throughout their lifetimes, the claims outgo for the insurance industry will only see a surge in times to come.

How have some of the companies in the insurance space fared in the past few days?

Insurer Royal London has recently paid claims amounting to £8.5 million to nearly 1200 families of customers who had died of COVID- 19 and has set aside another £10 million for future claims. Legal & General has also made the payment of £36 million for claims to families of its policyholders who died of the disease while Aviva made a payment of £36 million to families of its policyholders while also making a further provision of £165 million for potential future claims.

Royal London's pre-tax losses for the six-month period ending 30 June 2020 stood at £181 million against a profit of £397 million for the corresponding period last year on account of lower investment returns so far this year.  Its sale of new pension and insurance products were hit in the first half of this year because of the lockdown where it shrank to £4.7 billion for the period compared to £5.8 billion for the corresponding period last year. Similarly, its individual pension sales also fell to £2.6 billion for the period, and the workspace pension sales also fell to £1.4 billion. However, on the front of the sale of life insurance, illness, and income protection policies, the company saw its sales increase by 15 per cent to £407 million.

What are the risks that could prove potential pitfalls for the industry?

There are, however, two major risk factors that could prove to be unbecoming for the insurance sector in the coming year. First is the resurgence of the coronavirus pandemic in the winter months. Several experts have pointed out that based on the previous experience of the SARS and MERS coronavirus strains, it is likely that the COVID- 19 strain will also make a seasonal come back every year. If this happens this year even before a cap is put on the current spread, the consequences will be disastrous. All the economic recovery that has been done in the past few months following the reopening of the country in May will be undone, and a re-imposition of the lockdown may even be required. Second and the more critical factor in the effectiveness of the vaccine that is currently being purported as the silver bullet against the coronavirus pandemic. There are high hopes among health professionals as well as administrators in the country that the vaccine will be able to stop the infection from spreading, and fewer people will get sick. However, in case the vaccine does not prove to be as effective as is being envisaged; the healthcare and economic situation in the country will only deteriorate and would consequently put pressure on the insurance industry.

What is the silver lining for the insurance industry as it transitions through the pandemic period?

The outbreak of the coronavirus pandemic was an unexpected event for the insurance industry. Though the industry is resilient enough to process through whatever claims that may arise this year because of the pandemic related deaths, but it will soon be able to adjust itself to the enhanced risk level to reach an equilibrium. The enhanced provisioning, however, required in the current period in view of the potential claims over the next one year will reflect on their bottom lines in the current as well as the next financial year periods.