Deep impact

By John Deex

A new report analyses the effects of COVID-19 on insurance, class by class, and finds all are likely to take a hit

While there are some standout contenders – see travel, trade credit – Taylor Fry’s recent Radar report suggests very few, if any, lines of insurance will escape unharmed from this year’s pandemic.

The annual analysis draws on Australian Prudential Regulation Authority data to look at trends across each class of insurance, and unsurprisingly this year’s findings are dominated by the impact of COVID-19.

“By highlighting the challenges and opportunities in these particularly testing times, we offer you a clear picture of the industry, where it’s headed and your place within it,” Taylor Fry principal Kevin Gomes says in the report’s introduction.

That picture, unfortunately isn’t too pretty.

Mr Gomes says the impact of COVID on insurers is “significant”. Travel is in a mess. So too is trade credit, which doesn’t feature in the report because APRA doesn’t provide separate data.

While experience varies by class of business, it could be that none will escape entirely.

“Most lines of business are likely to experience adverse effects, as poor economic conditions and increasing community hardship constrain premium increases and apply ongoing pressures on claims,” Mr Gomes says.

Taylor Fry believes that during “an unprecedented time of disrupted living, uncertainty and historical change”, insurers are grappling with five big themes – pandemics, a warming climate, mental health, cybersecurity and restoring consumer trust.

While COVID has been the focus for most insurers over the past six months, Mr Gomes says the industry must not take its eye off other longer-term risks such as climate change “with its ongoing and far-reaching implications”.

Radar contributor and Taylor Fry principal Win-Li Toh (pictured) told Insurance News that while the issue of restoring consumer trust isn’t covered in detail in the report, in the light of the Hayne royal commission findings it is still a key concern.

“The insurance industry is very much in the headlights but in kind of a negative way,” she says.

“It has some work to do in restoring consumer trust, and to really educate the public about what’s covered and not covered.

“If the insurance industry is innovative and works together to create products that respond in people’s time of greatest need, then that’s what is required.”

Here are highlights of some of the key sectors dealt with in the report.

Travel insurance

Travel is the big loser from COVID, with many insurers having stopped issuing near-term travel policies due to government restrictions.

The Radar report shows that premium volume descended into negative territory in the June quarter as refunds for unused travel policies were provided.

Loss ratios were “generally stable” over the past 12 reporting quarters, with a notable spike in March 2020 “mostly due to cancellation claims arising from COVID-19”.

The declaration of a pandemic by the World Health Organisation in late March likely activated pandemic exclusion clauses, explaining the drop in loss ratio seen in the June quarter.

COVID-19 has caused a “sharp increase” in travel insurance-related complaints to the Australian Financial Complaints Authority, the report notes.

“Balancing financial concerns and customer loyalty is delicate territory for insurers – how they handle claims and refunds will impact community perception of their brand.”

Ms Toh told Insurance News travel is “clearly the hardest hit class” and it’s not clear when things might improve.

“There is uncertainty around when borders might reopen and whether people actually want to travel again when borders reopen,” she says.

“That has implications for staff morale and engagement.

“You might have no premium for a whole year, so can you keep the business going? A lot of travel insurers are part of organisations that also sell other types of insurance so they have capital, and even though there is no income they might continue investing for the longer term.”

Ms Toh says the industry must respond to the level of complaints around declined cancellation claims.

“Either it makes it very clear that these sorts of things are uninsurable, or finds a way to insure them by charging more or being clever with different reinsurance arrangements.”

But she believes the travel insurance industry can recover.

“People talk about climate change and the frequency of flying, but it could be that once we get out of a pandemic world, people won’t just jump on a plane and fly here and there for no good reason.

“They might plan trips that are longer and more thought-through. Instead of going to Italy for a week you might think, ‘I’ll just go once every three years and I’ll go for three months’.

“Trips could be fewer but longer and more considered, and premiums could recover.”

Motor insurance

The June quarter loss ratio of 48% is the lowest on record for domestic motor, driven by a reduction in collision claims.

COVID-related restrictions led to a substantial reduction in the number of cars on the road, which “reduced claim frequency and generated a short-term windfall for domestic motor insurers”, the report says.

But it says the longer-term outlook for profitability is “not so rosy” as car use may increase following the end of lockdowns if people see public transport as too risky an option during a pandemic.

“With a decline in public transport use and more people driving, claim frequency may exceed pre-pandemic levels.”

New vehicle sales have also declined since 2017, and this trend can be expected to accelerate during the COVID-19-induced recession.

The increasing prevalence of technology in motor vehicles is also raising the cost of repairs for insurers.

Many insurers provided some refunds to customers to account for fewer claims, but Ms Toh says it was hard for insurers to estimate the correct level.

“It’s hard to know what is going to happen in the next nine months. There might be more driving rather than less driving.

“Repair costs have been going up and up. The technology is really quite sophisticated.”

It’s a similar story in commercial motor, which also featured a record low loss ratio in the June quarter.

But if the recession forces industries to scale back there will be a “flow-on impact to commercial motor premium volumes”, the report warns, and the repair cost pressures are the same as in domestic motor.

In Compulsory Third Party (CTP), combined ratios for all jurisdictions have increased over the past three years and are now above 100%.

And while reserve releases have reduced reported loss ratios, their effect has lessened over time.

“Although COVID-19 reduced traffic volumes and claim numbers, the full impact on costs will take longer to realise,” the report says.

“This is due to the nuances in CTP claims, such as the time for claimants’ injuries to stabilise, and the size and complexity of claims.”

Householders

Despite the immediate focus on COVID, natural perils remain key to householders insurance and highlight the urgency of climate change.

Severe weather events resulted in underwriting losses in the December 2019 and March 2020 quarters, and there is upward pressure on reinsurance rates.

COVID-19 is likely to exacerbate insurance affordability issues, the report says, and as the economy moves into recession increasing numbers of customers will seek hardship assistance.

“The expectation is that total premium volumes will drop and under-insurance will increase, due to the pandemic and associated economic recession.”

Ms Toh says that while COVID has had an impact, natural catastrophes are more crucial.

“With COVID, there is discussion around fewer burglaries, because people have been at home for three months, or that with burst pipes and so on you can see to them quite quickly because you are at home rather than in the office.

“But on the other hand, there are higher risks around natural perils.”

She says the affordability issue could get worse, but believes more effort is now going into discussions about mitigation.

“There is a lot more discussion and co-ordination between governments and private insurers and individuals about how to prevent these things. I think there is a lot more desire to work together.”

Workers’ compensation

COVID-19 and the associated economic impacts are expected to adversely impact workers’ compensation schemes across Australia.

Lower premium volumes and an increase in claims costs are expected, but the full impact is not yet visible in the APRA data.

Challenges include managing indirect claim impacts such as shifts in working arrangements and demands, and COVID-related restrictions which are expected to lead to an increase in psychological claims.

“In addition return-to-work rates may deteriorate due to difficulties with injured workers finding suitable duties in industries impacted by COVID-19,” the report says.

Lower and more volatile investment returns will place pressure on future premium rates and funding positions.

And Australia’s first recession in almost 30 years means there will be fewer employers paying premiums in future, and “there will likely be resistance to future premium increases from industry and government”.

Commercial property

Profit trends in commercial property “remain poor” despite rate-hardening, the report says, “with significant catastrophe claims emphasising the ongoing and far-reaching implications of a warming climate”.

The insurance cycle turned in 2017, with commercial property rates continuing to harden over the past three years.

But this year “profitability remains poor, with combined ratios well above 100% over the first half of the year and consistently above 100% for the past five years”.

Business interruption cover is often written as an add-on, the report says. Insurers will be studying the recent UK test case decision, as well as preparing for the findings of the Insurance Council of Australia case in the NSW Appeal Court.

The Australian case aims to determine whether insurers can rely on pandemic exclusions that refer to the Quarantine Act 1908, given the legislation was repealed and replaced by the Biosecurity Act 2015.

“Now that the rates are turning, we have had the bushfires and storms,” Ms Toh told Insurance News.

“There was almost $1 billion in commercial property claims. Climate change is a big issue for commercial property and all insurers are taking climate change extremely seriously.”

Professional indemnity

Despite rate increases, professional indemnity loss ratios have increased over the past year, the report says.

“These have been impacted by reserve strengthening and class actions affecting directors’ and officers’ (D&O) liability cover.

“Class actions have adversely impacted D&O claims over several years, with potential for the economic downturn under COVID-19 to instigate further claims activity.”

The report says market conditions deteriorated significantly for some sectors, with price increases and capacity decreases particularly affecting financial advisers, property valuers and building surveyors.

Elevated cyber risks highlight the need for insurers to fully understand cybersecurity and how to properly price for it, with particular emphasis on ‘silent cyber’ claims, where an insurer may have to pay claims for losses under a traditional insurance policy not designed for the purpose.

“As a whole [professional indemnity] looks profitable but certain sectors have had market positions that are poor,” Ms Toh says.

“Some professions will be better, some less so. D&O has been impacted by class actions. There are some regulatory changes recently that might stem some of the more predatory activity.

“Certain sectors are hit harder, such as building surveyors due to the issues with flammable cladding. It’s getting harder and harder for building surveyors to get cover.”