Hazel Beveridge and Harshitta Malakar take stock of the changes and challenges that COVID-19 caused in general insurance during the first lockdown
Although the world has witnessed outbreaks of infectious diseases before, most were contained locally, and more quickly, than the current COVID-19 pandemic. As a result, they had smaller and more localised economic and social impacts. COVID-19 containment measures have forced business closures, event cancellations and a general dampening of economic activity, resulting in a substantial decrease in GDP and employment. In the Eurozone, the Q2 2020 seasonally adjusted GDP is down 12%, and employment in terms of number of persons employed and number of hours worked has fallen by 2.7% and 10.7% respectively. It is expected that the impact of COVID-19 on Lloyd’s of London will be greater than the impact of large losses witnessed post-2012.
What will the pandemic’s impact be for general insurance, particularly from the perspective of reserving?
Our ICAT workstream, studying claims inflation and development, circulated a survey in October 2020 to general insurance actuaries around the world. Most responses were from actuaries working in the India (37.5%), UK (20.8%) and US (10.4%) markets, with others including Africa, Singapore and other countries in south-east Asia. Of all respondents, 77% work in reserving. The survey addressed the following issues:
- Changes in claims frequency and severity that have been witnessed in various classes
- Impacts on reporting and settlement delays – we asked if these delays persisted post-easing of initial restrictions
- Changes to reserving assumptions, if any, that actuarial teams had made
- Challenges faced in reserving during the pandemic including in terms of data and definition of insured events.
Changes in claims experience
Nationwide lockdowns and travel restrictions have had an immediate and direct impact on motor, event cancellation, travel, short-term health indemnity, financial lines, and credit and surety insurance. These restrictions may also be expected to have a further significant impact due to job losses and delays in economic recovery. Business interruption is a more contentious area. Some policy wordings are ambiguous or do not explicitly exclude pandemics, which has led to some legal battles and political pressure for rulings in favour of the insureds. The impact on liability classes such as general liability and medical malpractice is expected to be medium to low. The impact on social inflation remains unclear and will need ongoing monitoring.
Reporting and settlement delays
The general response was that reporting and settlement delays increased during the early lockdowns, but started to get back to normal levels as restrictions were eased. Across lines and geographies, about 27% indicated that reporting levels were nearing normal and 11% believed that the delays in reporting still persisted. Likewise, 18% of respondents expressed that they were still seeing delays in settling claims, while 22% believed these were returning to normal levels. Reporting and settlement delays are expected to be large for business interruption claims that go to the courts.
Changes to reserving assumptions
Of survey respondents, 57% said they had made changes to reserving assumptions. Although a number of reserving techniques have been used, the most commonly used seem to be the basic chain ladder with adjustments to abnormally large/small development factors, ignoring 2020 altogether for calculating factors, or adding a tail factor to allow for late reporting and settlement. The Bornhuetter-Ferguson and expected loss ratio methods are also predictable favourite choices, with suitable revisions for loss ratios – for example downward for motor and upward for financial lines. Some other methods tried were frequency-severity and exposure-based models incorporating the trends observed during the past six months for classes such as motor. Individual case reserving was reportedly used for unique large risks such as event cancellation. The most common adjustment has been adding COVID-19 specific margins above the reserve estimates for prudence.
Challenges in reserving during the pandemic
With no clarity on how or when normality will return, reserving has been particularly challenging. There is also no way to know how the post-COVID-19 world will be, or whether we need to roll back assumption changes and to what extent. This makes it all the more difficult to understand and quantify long-term impacts. Lack of data on pandemics is top of the list of challenges, and there is also the possible emergence of latent claims; these may include increased workers’ compensation claims due to COVID-19-induced long-term disabilities, and cyber liability claims due to technological threats.
An immediate question is whether to recognise the benefits from this year’s lockdowns and, if so, to what extent. A further question is whether claims occurring during the second wave and resulting lockdowns are to be treated as separate from those that occurred during the first wave. There may be differences in the way companies are reporting COVID-19 data – for example, claims resulting from a chain of stores or hotels may be treated as one claim or handled separately.
Our research and survey show that COVID-19 is having an impact on the claim severity and frequency of many general insurance classes worldwide. Some actuaries are adjusting their assumptions and models to allow for the expected impacts on insurance company reserving and the added uncertainty that the pandemic continues to bring. This is a time when companies are revisiting their policy wordings, underwriting policies, and reassessing risk exposures and strategies for operational resilience in order to ensure we are more prepared for the future.
Hazel Beveridge is chief actuary at Pioneer Underwriting
Harshitta Malakar is an assistant manager at KPMG