Financial markets hate uncertainty, and the path of the present pandemic is nothing if not uncertain.
In taking steps to address short-term challenges, insurers should seek to strengthen liquidity and capital positions to not only navigate today's instability but also emerge stronger on the other side of the COVID-19 crisis. The goal is to determine actions that both protect companies financially through the crisis and place them in the best position over the long term. Here we present five potential actions to consider.
While the ultimate outcome of the pandemic remains unknown, it is necessary to consider possibilities long before finding out. Identifying scenarios to review, including a best estimate and various alternatives, will be important. Given the many different parts of the company being impacted, these scenarios are likely to include both biometric and economic assumptions. This may be a time when running massive numbers of scenarios should take a back seat to a limited number of integrated scenarios that will yield insights to the senior leadership team.
Risk mitigation comes in many shapes and sizes depending on the problem areas that emerge:
- Investment challenges may lead to redeployment out of certain asset classes.
- Capital challenges may lead to tighter underwriting, capital infusions, or reinsurance solutions to lessen the burden on the existing capital.
- Liquidity challenges may lead to increased borrowing or shifting new asset purchases into more-liquid asset classes.
Creating a framework to identify necessary actions and the cost of various alternatives can help senior management make the hard choices.
After identifying the necessary actions, creating a plan for implementation and getting the right people mobilized are crucial. With people working remotely and multiple requests hitting the finance team simultaneously, this may take more decisive action than usual. Bringing in additional resources to help with the process may be money well spent, and seeking support from trusted partners can ease the burden.
The situation is extremely fluid and setting a plan in place is not enough: An agile process must be created to update the plan in order to adjust to changes in the situation. This is not just for adverse scenarios: It might also apply to lowering the cost of mitigation if things start to take a turn for the better. Having a plan in place allows monitoring to be more effective, with a point of departure for comparison.
No one wants to take a hit to new business, but this list would not be complete without addressing this issue. There could be an increase in protection sales activity, reflecting greater awareness of the need for coverage. For non-strategic products, slowing the pipeline to take the pressure off capital and investments might be beneficial. For strategic products where years of effort have gone into creating distribution, reinsurance of a larger portion of the flow can offer a better answer than actions to reduce sales. Financial reinsurance alternatives can help with capital issues if the company is equipped to handle the underlying risks.
The “new normal” has become a popular phrase: As with other major events, the changes that will come from the crisis and the reactions to it will change the insurance landscape. But the first order of business is managing through the crisis, and the ideas shared here can serve as a guide for how to approach the different business challenges presented by the pandemic right now.