Insurers' responses to COVID-19

BACKGROUND

COVID-19 has continued to be an area of focus for insurers. When we reported last year, the impact of COVID-19 had not been reflected in insurers’ financial disclosures, but insurers had given some indication of how they expected the pandemic to impact the information disclosed through the additional narrative required under Article 54 of the Solvency II Directive for “major developments”.

This year, insurers have been able to provide a clearer picture of how COVID-19 has impacted their earnings and solvency levels during 2020. However, widespread uncertainty remains a central theme.

Click here to find out more on the impact of COVID-19 on capital.

EARNINGS

The impact of the pandemic has been felt across the industry. While some firms reported significant losses, others reported large profits. Firms that reported losses appear to be those with large exposures to business interruption and event cancellation policies, whereas those that reported improvement in earnings are mostly motor insurers.

From our sample of insurers, 55% of firms provided quantitative details of the impact of COVID-19 on their business. Examples of insurers disclosing negative impacts of the pandemic on their earnings include:

FBD disclosed that it has been negatively impacted by publicity on business interruption policies, accounting for €54m net claims incurred out of a total €221.4m for the year.
Lloyd’s reported COVID-19 losses of £3,433m, accounting for nearly 60% of the major claims. Losses are concentrated in four classes – contingency, property (D&F), property treaty and political risk, credit & financial guarantee – with approximately 44% of the claims originating from the US. This contributed to Lloyd’s total net underwriting loss of £2,676m.
Markel International disclosed that COVID-19 resulted in additional gross losses of $130.8m (net $108.0m), primarily from the business interruption and social welfare books.
XL Insurance disclosed that its earnings dropped by €143m due to COVID-19, driven by business interruption and event cancellation claims.
Covéa reported that its underwriting result has been adversely impacted by the cost of claims relating to the pandemic. Commercial and protection claims were significantly higher than anticipated, including net business interruption claims of £46.5m due to lockdowns, and £7.1m of payment and income protection net claims.

Examples of insurers disclosing favourable impacts of the pandemic on their earnings include:

Ageas reported that it benefitted from lower frequency of motor claims due to less traffic on the roads, due to COVID-19, which offset multiple weather events during the year.
esure disclosed that its motor account generated a trading profit of £91.4m, an increase from £54.4m in 2019, benefiting from the impact that the lockdowns had on the number of motor claims, and disciplined underwriting.
Soteria disclosed that COVID-19 has led to the largest profit before tax that it has achieved in several years, due to reduced motor claims from lockdowns.
UKI reported that COVID-19 led to a modest net benefit to its results, disclosing that its motor attritional loss ratio improved by 14.6% points to 66.6% (2019: 81.2%) as a result of lower claims frequency.

Nearly all firms (94%) mentioned the impact of COVID-19 on their underwriting performance. Some firms provided details on how COVID-19 impacted their combined ratios, for example:

AXIS Re disclosed an increase in its net combined ratio from 93.8% to 113.2%, of which COVID-19 losses contributed 12.2%, mainly in property and accident & health.
LV= reported that its combined ratio improved from 95% to 83%, primarily due to significant reductions in motor frequency from the lockdowns and restrictions.
Lloyd’s reported that its combined ratio increased from 102.1% to 110.3%, where COVID-19 related claims accounted for 13.3% of the combined ratio.

While the industry’s exposure to COVID-19 losses became clearer over the year, the overall impact of the pandemic, including the indirect impact of changes in economic conditions and the wider socioeconomic environment, continues to be a key area of uncertainty. Some firms disclosed the strengthening of their reserves to account for this uncertainty. For example:

Arch Reinsurance recognised loss reserves from COVID-19 in respect of both direct and anticipated indirect losses.
Endurance Worldwide added an additional load within the technical provisions to allow for uncertainty of the ultimate impact of COVID-19.
Travelers added 4.6% to loss ratios in the expectation of increased claims frequency and severity due to the economic recession following the pandemic.
Veterinary Defence Society set aside additional reserves of £0.5m to reflect possible economic and environmental impacts of risks arising from COVID‑19 and Brexit.

We expect there to be additional claims uncertainty over the coming year, with the potential for increased claims activity as social distancing rules ease and courts start to get through the backlog of claims which built up during lockdown.

RESERVING UNCERTAINTY

RISK MITIGATION

As COVID-19 losses started to crystalise over the year, insurers turned their attention to improving risk management processes and underwriting practices, from tightening policy wordings to exiting classes of business:

HCC International disclosed that it developed a pandemic risk register to identify the potential risks of a pandemic by risk area, and ways to mitigate these risks.
Markel International disclosed that cancelled events impacted its contingency book and, as part of its continued review of its underwriting appetite, it has decided to exit the contingency class.
RSA Group (where Marine, RSA and RSA Reinsurance are subsidiaries) mentioned that it is excluding strategic disease cover on certain products and, where there is affirmative cover, it is strengthening the policy wording so that cover only responds to specified diseases on the premises. The group also disclosed that a communicable disease exclusion is applied to its 2021 catastrophe, property, construction & engineering and marine outwards reinsurance treaties.

In addition:

Hiscox reported that work is being undertaken to identify the lessons that can be learned from the business interruption claims dispute, particularly in identifying other areas of unclear policy wording to ensure underwriting intent is aligned with customer expectations.
Scottish Widows Group (where Lloyds Bank GI and St. Andrew’s are subsidiaries) reported that it started several initiatives to evaluate the lessons learnt from the pandemic, including a group-led review of governance structures, and the adoption of a “risk surgery” approach to review all temporary changes made to the processes, to ensure these were effective and led to fair outcomes for customers.

30% of firms mentioned initiatives to support policyholders and wider commitments to social responsibility. This includes initiatives to “give back” to their policyholders, especially for firms that have benefited financially from the pandemic.

Last year, we reported that motor insurers Admiral and LV= offered premium rebates to their customers due to lower claims activity during the lockdowns. In addition:

FBD provided premium rebates to its motor customers of €35 each. It also mentioned other measures to help customers such as suspension of cover reductions and payment flexibility.
RSA Ireland refunded €8m in premiums to its motor customers. It also extended its payment terms, allowing customers more time to pay premiums without the risk of a policy cancellation.
Direct Line Group (where UKI is one of its regulated entities) incurred £93m in supporting customers, which included customer refunds, job protection, charity donations and supplier support measures.

Health insurers Bupa, Irish Life Health, VHI and WPA also provided premium rebates to their customers as claims costs dropped due to non-critical treatments being delayed as private health care facilities were temporarily used to support the public system. Bupa pledged a premium return to its UK PMI customers, equivalent to approximately one month’s premium, totalling £125m. Separately, Vitality Health introduced a cashback benefit of up to £5,000 for any member hospitalised with COVID-19 and enabled members to have virtual consultations where possible.

Other firms also offered premium payment flexibility:

BHSF offered premium holidays for those policyholders in need of support. It also made changes to its products to better suit the costs of COVID-safe treatments.
Exeter Friendly Society supported policyholders who were struggling to pay premiums because of the UK-wide lockdown, taking an individual approach on each case. This approach allowed the company to retain 80% of members who were struggling to pay for their policies, who have now returned to their regular premium payments, with their cover still in place for the future.

Some firms also mentioned commitments to social responsibility:

Assurant (the parent of Assurant GI and London GI) has been active in maintaining its support within local communities by delivering on its charitable contributions and commitments.
Ecclesiastical has continued to give to charity and donated £2.7m during 2020 despite the pandemic. The company has now given over £99m to charity and is about to meet the £100m target it set itself back in 2017.
RSA Group (where Marine, RSA and RSA Reinsurance are subsidiaries) gave customers who work for the NHS extended insurance cover to thank them for their efforts in battling coronavirus. These customers also received priority service, free courtesy cars, and extended cover for home emergencies. The group also mentioned that it is a significant contributor to the insurance and long-term savings industry’s COVID-19 Support Fund.

POLICYHOLDER SUPPORT AND SOCIAL RESPONSIBILITY

EMPLOYEE SUPPORT

20% of firms mentioned support for their employees through various initiatives, including financial support and mental health support for those that need it.

AIG UK held wellbeing workshops for employees, offered financial support to those in need, and extra time off for all employees to focus on their mental health. Also, “Being Well at AIG” was developed to provide support on topics such as helping children to cope with the cancellation of exams and managing the back-to-school process.
Arch launched wellbeing initiatives during the year, including the Mental Health First Aider team, who provided support to staff during the pandemic.
esure implemented initiatives to protect the health and wellbeing of its employees. In the esure Group Annual Report, it notes that it has launched a business wide “No Apologies” campaign for parents balancing working from home with childcare and offering free online health and wellbeing classes.
HCC International introduced a range of initiatives to assist with staff welfare and mental wellbeing, such as online exercise and hobby sessions, staff surveys, training sessions and additional employee assistance services.
RSA deployed resources to ensure its people have received appropriate support regarding physical and mental wellbeing during remote working.
Simplyhealth Access launched “Wellbeing Weekly”; an email publication that provides support around the company’s four pillars of wellbeing: mental, physical, social and financial, as well as a new health and wellbeing programme “ENERGISE YOU”.