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The critical role of insurance in navigating the economic crisis ahead

08 May 2020

Navigating the turbulence of a global economic crisis requires insurers to maintain an even ballast between the cargo of customer interests and buoyant solvency.  In New Zealand, rated one of the riskiest for its size, the challenge is arguably more difficult.

Next week’s Budget may shine more light on the economic outlook. Treasury’s scenarios to date are bleak enough. The most optimistic sees unemployment rising to 10% and under the bleakest scenario to 26%. Major contractions in GDP and business failures are part of the mix.  Much depends on the global economy, additional Government fiscal support and the duration of COVID-19 restrictions.  

Insurers’ are supporting their customers with a range of measures to maintain protection for them while cushioning the financial impact for those in hardship by adjusting terms to reduce costs and payment arrangements.  ICNZ has also developed links with those who work with the most vulnerable in the community to ensure a dedicated person with each insurer is there to respond to hardship issues.

Insurers must also have an eye to their own finances. Regulators require insurers to maintain higher levels of solvency than other companies, so they can be there to meet commitments to all policyholders, especially when natural catastrophes occur as they have done in recent years.

But insurers like everyone else face a drop in income as interest rates and assets values fall.  Looming business closures and general economic downturn will also impact future premium income.

With that in mind, insurers will prudently stress test their solvency positions against the bleakest scenarios mindful that regulators will want them to preserve their capital positions and if possible, to build them.  For that reason, in many countries, dividend distributions have been strongly discouraged by the regulator.

Regulators want to see healthy buffers above minimum levels of solvency to ride through the extreme economic uncertainty and to support customers.  That is what insurers here are doing.

The rationale being that insurers’ long-term interests lies in protecting customers, so if everyone came out a bit stronger then it is better for all in the long term.  If the downturn is deeper and longer though it could result in bigger challenges, but we are a long way off that.

Till then, each insurer must carefully balance their ability to assist their customers now with ensuring their long-term sustainability and meeting obligations to all their customers should a natural disaster strike. 

Looking to the supporting wider recovery, insurance has a vital role to play too. Insurance capacity is available here to support major construction projects and the multiple risks including Advanced Loss of Profits and Delayed Start-up cover.  Although COVID-19 is causing disruption, delay, and potentially increasing project costs these will not be covered by insurance as standard pandemic exclusions will apply.

However, that will not be an obstacle to progress these projects if the impact of COVID-19 on project costs is well understood.  Winter month delays are factored into projects all the time, so a new dynamic need to be factored into calculations.   

Looking still further ahead, unless we experience a benign economic period, then all countries will enter the next crisis with less collective fiscal firepower than they had for COVID-19.  This has led some to promote the need for public-private insurance arrangements to be developed to better meet the systemic, economic fall-out of a pandemic.  Much the same could be said for climate change losses which will dwarf that of COVID-19.

As we prepare for the future, insurers will have the opportunity to deploy their risk expertise and learnings from COVID-19’s impacts to develop products for their customers and work with governments to reduce the impact of the next global pandemic.