COVID-19 is prompting insurers to focus on both the financial and operational resilience of their companies as they try to manage the economic challenges created by the virus.
It’s no surprise that insurance prices are rising as the industry assesses the magnitude of the risk and losses connected to the pandemic. U.S. commercial insurance prices rose by almost 10 percent overall compared to the same period a year ago, the biggest quarter-to-quarter shift since 2003. This will help insurance companies with the resilience of their balance sheets.
Financial resilience
This is a normal “market hardening” response as the unit price of risk goes up across P&C lines. It’s also a cyclical response to a degree, as prices tend to come under pressure when loss trends are fairly stable or low, and the market hardens when risk and losses increase. It’s one way the industry returns to profitability, and we’ll certainly see higher prices as the market continues to harden because of the scale and risks associated with COVID-19 and catastrophic events.
But carriers will also have to look beyond financial resilience and focus on their operational resilience because the effects of COVID-19 are certainly testing it. In a matter of weeks, the pandemic forced insurers to provision and reconfigure their workforces to operate remotely, requiring their operations and technology infrastructures to work in fundamentally different ways.
Long-term operational resilience
With such dramatic changes in such a short time, insurance carriers will first need to re-examine their operational resilience in terms of risk, security, and cost, and then adjust it to match the new reality.
Because the market has shifted so much this year, insurers will need to reconfigure their existing book of business to address those changes. The small commercial insurance market, for example, is fundamentally different than it was as recently as February.
Imagine a restaurant owner who today relies much more heavily on delivery services. Does that owner truly understand the associated changes in risk exposure? Will the restaurant need new and/or different coverage?
New products
Beyond market shifts in existing coverages, the wide-spread effects of COVID-19 are prompting customers to consider products once considered rare or esoteric.
Event cancellation policies, for example, are receiving much more interest. Customers took notice when Wimbledon received a large payout after it cancelled its famed tennis tournament. This is an area with great potential for new revenue.
Similarly, parametric insurance, which pays damages in response to the occurrence of a specific event instead of covering actual damages, is also receiving new attention. There actually was a parametric policy offered to provide coverage for business interruption in case of a pandemic, but nobody purchased it. No surprise, there is now a much greater interest in this and similar products.
Migrate to the cloud—now
Each of these factors together can help increase operational resilience. But long-term resilience will not occur without a more rapid migration to the cloud. It is now an imperative and the foundation to facilitate digital workforce operations, improve data security, speed new and improved products and experiences to market, and implement structural cost reductions.
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