11 February, 2021

Top insurance risks to watch for in 2021

By: Cesilia Faustina

The insurance sector has experienced its fair share of hardships since the rise of the COVID-19 pandemic. According to S&P, reinsurers stated about $12 billion in COVID-19 loses in the first six months of 2020. HSBC had also reported that COVID-19 claims had increased three times during the second quarter of 2020, from $6 billion to $20 billion, many of which came from the property and casualty sector. That said, such losses are to be expected for the insurance sector during a pandemic and (re)insurers are generally prepared for loss events. Overall, the insurance sector has fought resiliently despite the challenges of the pandemic, of course, financial losses will need time to work themselves out and insurance specific efforts will be needed to support this recovery. With many of the financial markets recovering though, we can only expect greater rehabilitation plans for this sector in 2021.

The insurance sector is progressively readjusting since 2020, however, their job is not done yet. COVID-19 is still on the loose, along with the new strain, and people are still worried about what is to come, with continuously rising infection rates and uncertainty of vaccine availability. With that in mind, the sector is expected to come out in 2021 still fighting losses, however, they are likely to be more prepared this time around, as 2020 has provided plenty of growth and recovery planning for the following year. This is why it is smart to evaluate the risks that may follow going into 2021, as this sector will most likely still be faced with liabilities this year.

Here are the top insurance risks we should watch out for.

Plunging equity markets and interest rates

COVID-19 has affected the financial market quite greatly, with plenty of losses in 2020, the insurance sector will still be faced with the aftermath of these effects. Many uncertainties also still lay ahead and the current stock losses all over the world are not helping. This is affecting insurance in providing interest rates, which has been going down significantly since the pandemic. This, along with guaranteed policies, could put pressures on (re)insurers’ profitability and technical performance.

Weak investment opportunities

Uncertainty is causing weak investment markets, which in return will make it more difficult for insurers to set up interest rates. The global economic market is not looking great for any investments, which puts many industries at risks. Investment uncertainty has especially impacted the P/C market, which is still trying to recover from the impacts of 2020. Weak investment performance will limit any activities by (re)insurers, as it will affect their market-to-market performance and asset quality.

Foreign exchange risks

Subdued economic conditions have put premium growth at a stand-still, which is affecting insurance profitability. One of the factors that contribute to insurance’s weak performance is the uncertainty of foreign exchange. Uncertain economic conditions have caused weak foreign exchange rates which have devaluated currencies in non-pegged regimes. This will increase the cost of claims, making it difficult for insurers in affected countries like Turkey, South Africa, and Angola.

Uncertain government policies

The changes and need to adapt caused by COVID-19 have impacted many government and regulatory policies, and with it, greater risks and uncertainty for the people and businesses. A situation like this is making it harder for insurers to set up policies and has led to unpredictable claim settlements. As the year still lays great uncertainty ahead, government bodies are trying to adapt to the situation, in supporting economic growth and their citizens, however, this also means we are likely to be faced with even more changes within regulatory policies, which will make it hard for (re)insurers to properly support their clients.

Intense competitive environment

The pandemic has created an intense and competitive environment for (re)insurers. Greater uncertainty means greater demands and coverage for the people, which not all insurers may be able to fulfil. Insurance companies are in intense competition to fulfil these demands, which would most likely mean price wars, which would end in financial losses for many. The current environment is making it difficult for insurers to keep their usual rates, as many out there are trying to provide the best prices, this will only cause greater pressures for the insurance sector which may end up increasing losses rather than saving them.

Taking into account the long-term impacts these risks and COVID-19 may cause to the sector, (re)insurers can better plan for 2021 and beyond as they have gone through the major shocks in 2020. We are still facing challenges ahead, and though there have been improvements economically, (re)insurers still need to ask themselves what the most sustainable options are to mitigate risks and come back from major economic changes. By remembering some of these risks, the insurance sector can progressively come back on top and continue to perform resiliently despite the challenges.

For more information on insurance risks, check out S&Ps Global Insurance Risk report and on information regarding insurance solutions to help mitigate risks, check out ESKADENIA’s digital management systems for insurance.

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