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How could the coronavirus affect the insurance sector?

In fiscal 2020, the insurance industry saw strong growth of 13% for non-life insurance and 18% for life insurance through February year-over-year.

Although awareness of health products has increased, renewal may be delayed due to a shortage of funds in the hands of policyholders. New launches of savings and general insurance businesses are also expected to ease. Growth in the health sector of the SME group is likely not to occur in the short term. Furthermore, expecting an increase in claims in the short term indicates the potential for loss ratios. With a substantial decrease in credit interest rates, the spread increases and therefore the credit discount rate used to calculate the mathematical reserves will reduce the pressure on the premiums. The opportunity to reinvest mature assets also becomes difficult due to the prolonged outlook of the low interest rate environment.

There will be additional pressure on capital as growth levels affect absorption of overhead. Additionally, asset values ​​will decline as credit spreads and credit quality deteriorate. The potential loss faced by reinsurers increases the credit risk to recoverable amounts giving an additional hit to the asset's value. All of this will negatively affect the solvency of all insurance companies.

As the epidemiological adoption of digital health products has seen an increase, insurance companies will need to develop web-based paperless / seamless travel applications. Operations must be profitable and must ensure increased productivity that can be capitalized after recovery. It will also lead to a greater degree of claims centralization and policy administration functions. The projected demand creates the need to develop products that focus on "lost business or revenue." By using COVID-19 as a convenient exposure of the proving grounds, CROs can verify the adequacy of the existing capital framework.

Some of the main policy recommendations that can be followed according to KPMG are
  • To ensure that policies remain in force, regulators can establish an automatic renewal with a grace period for reimbursement of fees.
  • Accelerated premium payments for government policies to ensure constant cash flow for businesses.
  • Regarding capital pressures, an increase in the limit of foreign direct investment could be explored.
  • The post-lockdown situation can be challenging and will require inexpensive products that require an expedited approval process to be beneficial.

As India is currently applying a factor-based system to calculate solvency capital, current events reinforce discussions in favor of a risk-based capital framework to fully calibrate and mitigate the risks that such events pose in the future.