COVID-19 and the insurance industry

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Practical steps for responding to the coronavirus crisis

The coronavirus (COVID-19) outbreak is causing widespread concern and increasing economic hardship for consumers, businesses and communities. We’ve prepared some general guidance on COVID-19: What US business leaders should know, which addresses six key areas of focus.  These include crisis management and response, workforce, operations and supply chain, finance and liquidity, tax and trade, and strategy and brand.

Most companies already have business continuity plans, but they may not fully address the fast-moving and unknown variables of an outbreak like COVID-19. Typical contingency plans promote operational effectiveness following events like natural disasters, cyber incidents and power outages, among other crises. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency.

The crisis raises a number of unique challenges. In PwC’s inaugural COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns. 


What are your top 3 concerns with respect to COVID-19? (Select up to three.)

Financial impact, including effects on results of operations, future periods and liquidity and capital resources
%
Potential global recession
%
The effects on our workforce/reduction in productivity
%
Decrease in consumer confidence reducing consumption
%
Supply chain disruptions
%
Difficulties with funding
%
Not having enough information to make good decisions
%
Impacts on tax, trade, or immigration
%
Cybersecurity risks
%
Fraud risks
%
Privacy risks
%
Source: PwC COVID-19 US CFO Pulse Survey
April 22, 2020: base of 305

What makes insurance different

Insurance companies play a pivotal role during times of economic stress by helping companies and households manage risks and cushion against losses. Yet, as one of the biggest groups of investors, they are also vulnerable to volatility in financial markets.

 

Crisis management and response

Issues the insurance industry might face:

Communications, both internal and external, matter now more than ever. The ways your company responds to a stressful event can shape employee and public attitudes far into the future and be a defining moment for your corporate culture.

You may face reputational or litigation risks if your firm is seen as neglecting policyholder concerns or dismissing employee concerns or safety.

Cybersecurity is also a key part of crisis management, because there can be additional vulnerability in the middle of a storm. This can result in significantly higher levels of remote access to core systems, and employees and management could be more susceptible to social engineering efforts in the midst of a crisis.

Steps to consider:

In this crisis, stakeholders already understand the basic facts. But, they also need to know what you’re doing, and how your actions will affect them.

Insurance companies have business continuity plans: that’s a given. Now that you may need to invoke it, you’ll want to confirm your emergency communications readiness, including outreach to employees, insured customers and other stakeholders.

  • Employees will look to you for guidance. Let teams know how you’re addressing their personal safety and how their jobs may change. Make sure everyone knows they have an obligation to stay “on message,” and remind them about guidelines for contacts with the press and social media.

  • Define how you’ll stand up for customers. Look for ways to show compassionate, decisive value to insureds and society to bolster long-term loyalty and impact, particularly by demonstrating your speed, flexibility and technical expertise.

  • Reach out to regulators to flag problems and risks, and proactively shape any regulatory guidance.

  • Realistically, communication matters for all stakeholders — now, more than ever. This is also a good time to review the frequency and content of your presentations and updates to investors.

You’ll also want to look at ways to strengthen your cyber protections because rising cyber attacks are aimed at exploiting this crisis. We recommend taking these steps immediately:

  • Conduct a phishing exercise now to reveal gaps in your defenses.

  • Strengthen your perimeter by using security tools to identify and deflect threats before bad actors can intrude.

  • Strengthen your remote access management policy and procedures. Make sure working from home doesn’t mean working without security. It’s now possible to transition to rapid, secure, remote work models within days rather than months.

  • Fortify your endpoint protection, and make sure devices and software are hardened and patched.

Workforce

Issues the insurance industry might face:

Office environment

  • You may need to restrict access to some physical facilities, in whole or in part, before they are exposed to the virus. Some employees may be challenged when asked to work elsewhere. You may find that some employees don’t have appropriate physical environments for remote work, or that your supervision and review processes aren’t adequate in those cases.

Understanding stress

  • Recognize that the current situation could be profoundly unsettling for many employees, some of whom may be dealing with medical issues, childcare challenges, family income disruption and more. Depending on the length or severity of the outbreak, many of your workers may struggle to adapt.

  • Employees may face stress because of disruption to income, quarantines, or illness among family and/or neighbors.

  • Some workers may become less engaged or abandon their work responsibilities, reducing productivity and quality, and harming customer experiences.

Human resources function

  • Your existing processes may not be flexible enough for the new way of working, especially since processes and norms are still being established.

  • Many long-standing expectations about everything from employee engagement to performance assessments could be inadequate.

Steps to consider:

As your employees adapt to alternate work locations, you’ll want to be flexible with work arrangements where you can.

  • Update your work-from-home policy, if necessary.

  • If your videoconferencing or other network technologies can’t handle the load, explore technology solutions that can.

  • Set up risk mitigation programs for employees who may still need to work on-site.

Help your staff adapt

  • You may want to include efforts to measure the “pulse” or morale of the workforce.

  • Communicate clearly and concisely with employees about steps you’re taking to reduce stress while you move ahead.

  • Your firm should review its plan for employee absenteeism, to be sure it’s appropriate for the current environment.

Managing your business

  • Adjust your policies to be sure they align with local regulations, such as entitlement to continued pay during quarantine, or covering costs of medical tests. You may want to consider providing expanded back-up child care services for employees. Consult with your risk management and legal teams about liability for newly remote employees.

  • Refine performance expectations. There will be a learning curve as you adapt to a change in work locations and processes, and you should expect a dip in productivity. You may also want to refine goals and incentives, such as sales quotas, for your employees.

  • Depending on your compensation planning cycle, consider delaying decision-making until the acute crisis has passed.

  • Consider how you will supervise remote teams and employees. Some teams already may be able to collaborate while working independently, but others may need help.

Operations and supply chain

Issues the insurance industry might face:

Physical supply chains are less significant for insurers than companies in other industries. But insurers depend on a wide range of third parties to deliver services, and their operations could be tested as the crisis wears on.

Third-party service providers are key to many insurers’ operating plans:

  • IT and other support services may deteriorate because of internal challenges or vendor problems.

  • Some service suppliers may operate extensively in areas hit hard by COVID-19. If off-shore, they may have limited or no ability to work remotely.

  • Your firm may have limited insight into the ability of suppliers to execute. For example, travel restrictions may hinder tracking of data centers and other suppliers involved in financial reporting.

  • Any business interruption among your suppliers, or their suppliers, could complicate your efforts to produce timely financial statements.

Insurance companies could see spikes in service requests, regardless of their market segment or role in the distribution channel:

  • Claims may increase, especially for long-term care, life and disability insurance. Even though specific losses may be excluded, some carriers could see a surge in claims involving health, travel, event cancellation, business interruption and supply chain policies. State/jurisdictional decisions may spur medical and workers’ compensation claims.

  • Web and phone traffic may surge, creating operational constraints or disruptions.

Steps to consider:

  • You’ll want to make sure that you understand — and are comfortable with — the business continuity plans of your business partners.

  • Determine if your suppliers have operations in areas hard hit by the virus. Review all suppliers, including those involved with information technology, outsourced customer contracts, premiums or claims processors (third- party administrators), payroll, fund accounting, custodians and third-party distributors.

  • Review service-level agreements and key performance indicators with vulnerable suppliers and sub-suppliers.

  • Ensure that whoever oversees vendors and third-party suppliers can avert or resolve supply chain disruptions.

Prepare now for a rapid rise in operational volume.

  • Look for ways to avert technology glitches in high-volume activities, including customer service and policy loan requests.

  • Determine whether your customer service team can operate remotely and whether you have plans to limit any disruption to customer service.

  • Review plans for solving problems with systems and controls.

Finance and liquidity

Issues the insurance industry might face:

How you assess your financial condition: The COVID-19 crisis is already shifting the way insurers will need to think about the valuation of their investments and liabilities:

  • Valuation and price discovery may become a challenge because of market volatility and a possible decline in liquidity for certain products. You may face challenges in assessing the value of investments, hedges or insurance liabilities, particularly with distressed or forced-liquidation sales. And you may see differences widen between GAAP and hedge targets.

  • As credit quality deteriorates throughout the economy, some insurers may need to address asset impairment and expected credit losses in their portfolios. In certain industries or geographies, for example, you may need to determine whether market events have triggered an impairment charge based on revised forecasts. Reinsurers, in particular, could face mounting losses that may increase credit risks on recoverables.

  • The regular cadence of loss recognition testing may be insufficient for the current environment. The assumptions you make about long-duration products may need to change. You may now have a different view on everything from long-term interest rates to mortality/morbidity than you had only a few months ago, and this could have implications on your Incurred But Not Reported (IBNR) reserves.

How you provide for contingencies: Some companies may find that they need to shore up their reserves against potential losses from the COVID-19 crisis. Dividends generated by regulated subsidiaries may decline. And subsidiaries, such as captives, may need capital infusions.

How you report on your financial conditionRegulators may step up oversight and requirements, including more detailed reporting on asset adequacy; consideration of stress-testing based on the pandemic; and consideration of impact on solvency. The New York Department of Financial Services (NYDFS) has already issued a circular letter requiring insurers to show how they’ll address disruption to operations and financial risk caused by the virus. You’ll also be required to make disclosures about the impact of the virus on your business within financial statements or other SEC filings in line with GAAP and SEC disclosure standards. Such disclosures may include risk factors, impairment, debt, liquidity, and management discussion and analysis (MD&A) regarding operating results and changes in key asset or liabilities balances.

Steps to consider:

  • You’ll want to reassess the reliability and validity of your company’s valuation policies, models and controls to reflect the increased valuation risk or reduced price discovery in the new environment, particularly in light of ultra-low interest rates. In particular, you may want to watch out for “the new normal.” There may be correlations you hadn’t anticipated, downstream models might change if there is a loss-recognition event, you may need to reassess volatility given new market conditions, and so on. All of this will need to be done in light of the new expected credit loss accounting standard, in which credit losses will need to be projected based on these uncertain events and outcomes.
  • In general, you’ll want to make sure that your loss recognition testing models include current market data and best-estimate assumptions. Note that updates could actually prompt triggering events. Timing could be an issue, too, so you may need to pursue more robust "off cycle" loss recognition testing. And, when considering recoverability of deferred acquisition costs, you may need to alter determinations of premium deficiency leading to impairment.
  • Firms may need to make additional provisions for what could become adverse circumstances. For some, this will mean assessing whether the capacity for dividends from subsidiaries will fall, and allowing extra time for regulatory approval. For others, this could mean updating hedging strategies and documentation, or revising trading limits and modifying “stress scenarios.” This is normal, prudent planning. Knowing what you know now, you may want to revisit limits, regulatory buffers, adequacy of stress scenarios and approval levels for large transactions.
  • Evaluate your ability to update disclosures, even in volatile circumstances. Make sure you understand what is required regarding virus-related disclosures required by the SEC, NAIC and other regulators, and then create a regular update process. Many companies may discover that their processes for monitoring and addressing changes to regulatory requirements are insufficient. You may need to make new disclosures about the business and risk factors, as well as management’s discussion and analysis of results, liquidity and capital resources. For example, your existing disclosures may not adequately address your hedging programs, differences between GAAP and hedge targets, and whether changes in hedging strategy and hedge targets are warranted.

Tax and trade

Issues the insurance industry might face:

Insurers have industry-specific tax reporting and compliance requirements. But the issues they’ll face filing and paying taxes are likely similar to those faced by other industries. For example, subject-matter experts may be working at a distance, collaboration tools may not be wholly effective, processes may be undefined, and so on. In the short term, these are probably manageable, but few firms have tested anything like this at scale over a long period.

All insurers have faced significant losses in equity markets, and this could have material tax implications.

  • Insurers and reinsurers may need to sell investments to fund excess claims payments, generating taxable capital gains or losses.

  • Life and non-life insurers are subject to different tax rules and will need to assess their unique positions with respect to the latest official guidance. For example, life insurers need to wait until a profitable year before applying carryback losses. Non-life insurers issuing health insurance can apply carryback losses without waiting.

Steps to consider:

  • Some of the most useful actions here will come after the immediate crisis has passed. Your goal should be to build a staffing and operating model that can address the current crisis and adapt to the next one — because there will be a next one.
  • In general, if insurers have significant equity losses resulting from recent market events, they may look to sell the securities and realize the capital losses. At that point, they may either (1) offset the losses by triggering sales of securities or assets with available capital gains, if possible, or (2) quickly file tax returns and generate tax refunds, if there is carryback potential to prior periods with taxable income. Such a carryback could apply to periods prior to tax reform, when income tax rates were much higher.

Strategy and brand

Issues the insurance industry might face:

The insurance industry is, like other businesses, vulnerable to a slowdown in US and global economic growth.

  • Access to loans and capital markets may decline.

  • Reduced access, or an increase in the cost of capital, may make obtaining capital difficult or expensive.

  • Current dividend plans and buy-back programs may no longer be appropriate.

In some cases, this may affect strategic development projects.

  • Some executed M&A and reinsurance agreements may be voided or modified, or closings may be delayed.

  • You may feel pressure to postpone strategic initiatives or expansion plans such as IT and infrastructure upgrades.

Steps to consider:

Make sure you have a clear picture of your financial options.

  • Be sure to evaluate a range of scenarios for your firm’s financial projections and capital needs, based on the situation as we know it.
  • For many companies, this will entail reviewing discretionary spending, non-essential projects, and both short- and mid-term liquidity plans. But you’ll want to think broadly about all the levers in your control: for example, this is a good time to assess the effectiveness of volatility-responsive fund strategies.
  • Review major business transactions to model various what-if or stress-test scenarios.
  • Review communications to stockholders regarding buybacks and dividends.
  • While some long-term projects can safely be put on the shelf, don’t automatically assume that this is the best approach. In some cases, companies are actually accelerating some key strategic initiatives because of how critical they are to the business, both over the short- and long-run.

Other considerations

Beyond these pillars, each industry will need to address some subtleties of its own. Here, we highlight industry-specific considerations and offer guidance on how you might respond to the challenges.

Interest rates are lower, for longer. We’ve never seen global interest rates this low at this point in an economic cycle. Now that Fed rates have dropped yet again, the industry is contending with even more margin pressure — and ever greater imbalances between what it earns and what it may need to pay out. (As we write this, some rates are well over 100bps lower than they were last fall, when annual budgets were set.)

This may play out differently across the sector. For example, corporate bond yields may remain low for an extended period, reducing tax discounts for property and casualty lines. Moving forward, this will almost certainly force companies to reconsider their operating models, as the existing approach will be hard to sustain with interest rates near zero. In some cases, we could see companies confronting difficult choices around divestitures or other permanent changes.

Claims will almost certainly rise. Companies that provide travel, short-term disability, business interruption and other specialty lines of insurance are likely to face mounting claims. Companies that sell such policies need to consider the worst possible outcome as part of detailed after-tax scenario planning. In almost every product category, there may be extended discussions about what’s covered and what isn’t. Insurers could find themselves balancing financial risk and reputational risk. At the same time, we note that risk management is an essential part of responding to a pandemic, and we are likely to see innovation to take advantage of new needs and delivery channels.

More exposure in some areas? The impact from COVID-19 may jar disability and long-term care insurance lines, altering anticipated loss ratios (ALR) or disabled life reserves (DLR). You may need to prepare for a possible disruption in the balance between reserves that are tax deductible and non-deductible. This event could also lead firms to take a broader look at portfolio hedging, beyond actuarial forecasts, to protect more fully against various exposure and exogenous shocks.

We may see more consistent regulation. State insurance regulators will probably coordinate and harmonize their approaches to COVID-19. Look for guidance from state regulators and the National Association of Insurance Commissioners (NAIC). Regulators and NAIC plan to meet shortly to hear from medical and consumer market experts about COVID-19. NAIC members will then discuss coordinated responses at state, federal and international levels.

Many risks are related. Insurers have a unique challenge in addressing the pandemic, because the current environment could cause large losses across a variety of different business lines. Here’s an example of this kind of ‘cross-accumulations risk’: an event that could cause a company to file business interruption claims, workers’ compensation claims for employees who are sick or injured, general liability claims from customers who report that they’ve been harmed, accident and health claims, and even claims against directors and officers. As the first wave of suits is being filed, many companies are discovering that it is tough to track cross-accumulated exposures, which involve resources that may currently be in short supply.

Insurance has plenty of subtleties. As industry insiders know, there are different accounting, tax and regulatory treatments that don’t apply equally to everything labeled “insurance.” For example, market volatility and declining loss ratios may reduce valuation allowances: reserves used to offset the amount of a deferred tax asset. Property and casualty companies may carry losses back two years and forward 20 years, without limitations on loss usage during the current year. Life insurers cannot carry back losses, but can carry losses forward indefinitely, and they face an 80% limit on current year taxable income. We recommend consulting your professional advisors to discuss your situation.

The way forward

In a time of global uncertainty, it’s easy to lose sight of the big picture. This is particularly true when the memories of the last recession are still relatively fresh. But it’s worth recognizing just how different the current situation is from where we were a decade ago.

  • Our financial system is far more resilient.
  • Many consumers are better prepared.
  • The damage is likely to be more contained.

This is why it makes sense to go back to first principles: what is your company’s purpose? We encourage our clients to start by determining the few differentiating capabilities they need to thrive. Even in a crisis — especially in a crisis — you’ll want to double down on the things that make your organization unique and purpose-led. Eventually, this crisis may even present some opportunities for the industry to transform and excel.

By focusing on one area, you may be consciously deprioritizing something else. Cutting spending indiscriminately won’t help; you need to identify your best opportunities for succeeding given the market as it is now and as we expect it to be. From there, you can shift investments to "good" costs and away from "bad," redirecting spending to the areas that lay the groundwork for sustainable, long-term growth.

Eventually, this crisis may even present some opportunities for the industry to transform and excel:

  • COVID-19 offers insurers a chance to build trust, brand and employee morale. Affirm to policyholders, prospects and staff that the industry’s core mission is to help manage risk and buffer against shocks.
  • There may be a number of appealing M&A opportunities; record-low interest rates, market volatility or an economic downturn could prompt dealmaking.
  • With person-to-person meetings now becoming less frequent, you may be able to speed up your firm’s shift to direct channel contact with policyholders and prospects.
  • Consider ways to improve your firm’s methods for managing persistently low interest rates and the compressed yield curve. 

Whether you’re trying to protect business integrity, empower your people, make better or faster decisions, or transcend through technology, it helps to take a long view. Once this crisis passes — and it will — where do you want your business to be?

For more than a century, our purpose — to build trust in society and solve important problems — has been at the core of everything we do. We stand ready to help.

Contact us

Matt Adams

Matt Adams

Insurance Practice Leader, PwC US

Ellen  Walsh

Ellen Walsh

Insurance Advisory Leader, PwC US

John Fosbenner

John Fosbenner

Insurance Assurance Leader, PwC US

Julie Goosman

Julie Goosman

Insurance Tax Leader, PwC US

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