Impact of COVID-19 on the life insurance industry - a temporary shock or a permanent change?

COVID-19 has impacted the normal life very badly in almost every country. Only World war had such a massive impact on the world in the past, probably not to the same extent. If you see the impact on the lives, the way so many people are getting hospitalized, so many deaths, and the unprecedented impact on economies, it's probably worse than the world war. And the scary truth is, it's still not over and we don't know when this horror will end.

Given this situation, it's impossible to assess the impact of COVID-19 on any industry, and life insurance industry is not an exception. What we know at this stage is, there was a 30-35% drop in business in March 2020 which is the most crucial month for the insurance business in India. The big question is, what's in store in future for the industry? Is this a temporary shock that will go away soon? or has this come to stay for some time? If the vaccine to everyone is a few years away, it has come to stay with us for some time.

In theory, when health and life are challenged, the insurance business should grow. It happened in other markets when there were SARS/MERS and other similar threats. The current pandemic created a much bigger fear among people and hence people should opt for more and more insurance. This should have ideally resulted into an industry growth. But there are issues coming in the way of this happening.

To my mind, there are two major issues that the industry needs to sort out:

1. Insurance sale is predominantly a people-intensive activity which is normally concluded after a face to face meeting, if not multiple meetings. How do you manage this in COVID-19 world, where face to face meetings are unlikely to happen in the near future?

2. In many markets, 80-90% of life insurance premium comes from savings products. Only a small proportion of premium comes from protection products. It's this protection premium that's going to go up due to the pandemic. Given the impact expected on the economy, savings premium may actually go down. If the stock market continues to be down, unit-linked products may go out of fashion for some time.

Many insurers are planning to use technology in a big way to replace physical meetings. With those technically savvy customers, it's probably easy. But even with them, selling digitally, a savings product that is perceived to be complex, is not easy. For other customers, reaching out to them itself is difficult. Job losses and salary cuts due to the economic downturn will make it even more difficult to pitch a savings product. If you focus on protection which is the product conducive for digital sales, the top-line will come down. However, this may not be a concern for bottom-line provided you plan your business and expenses well.

Further, due to falling equity market and with already falling interest rates, there can be issues with investment guarantees, reduction in fund management charges and other sources of revenue. In other words, revenues will fall, expenses will not fall at the same proportion and financials can come under significant pressure.

A lot of brainstorming is required within the insurance company:

1. How efficiently do you use technology to reach as many people as possible?

2. How do you train your sales force on the use of technology?

3. Is it worth focusing on direct business with some simple products?

4. Do you want to grab a bigger share of direct business and how?

5. Do you focus on savings products or protection or both?

6. How do you handle the impact on financials due to falling revenues?

7. How prepared is your company for these new challenges?

A tough task ahead for the industry. However, this is an opportunity to restructure the business with a focus on improving persistency and customer satisfaction.

I clearly see the requirement for a different distribution strategy and product strategy. I will share some of my thoughts on these two strategies in my subsequent articles. The 'business plan' discussion this time will be a real planning discussion to take tough decisions. When the going gets tough, only tough gets going.

We are in unprecedented times. The future business outlook is not looking great. It's time for a careful and very well thought-through planning and execution.

Please let me know your views on the impact of COVID-19 on life insurance industry by posting your views below or write to me at sai@ssactuarial.com.