Optimism or pessimism for insurance tech post-COVID-19?

On March 29 I did a webinar on “COVID-19, The Economy, The P&C Industry, and Tech Spending," subtitled “Time is of the Essence.” In the webinar I looked at how COVID-19 and the various shelter in place orders were impacting the US economy as a whole, and certain parts of the economy with special importance for the US P&C insurance industry (e.g. new cars, new homes, employed workers). I made some preliminary comments on the impact on the components of the P&C industry’s aggregate income statement. I turned to a discussion of potential impacts on technology spending. I concluded with the webinar’s tagline," noting four things:

• “If … the COVID-19 cases and the resulting economic shutdowns largely abate during Q2, several US economic forecasts show moderately positive growth in Q3 and Q4
• “And if P&C technology spending does follow the general financial fortunes of the P&C industry
• “Then The outlook for technology spending looks reasonably positive for 2020 Q3 and Q4, and for 2021
• “However other outcomes are certainly possible.”

As I write this blog on May 14, we are now halfway through Q2. Nationally, COVID-19 cases are abating somewhat And the economic shutdowns are being eased – although very unevenly in different parts of the country.

So in this blog, I’m going to revisit the last two topics of my March 31 webinar: How things look for key components of the aggregate P&C industry income statement, and the the implications for tech spending:

The Aggregate P&C Industry Income Statement
Premiums
Personal Auto: Since March 31, nearly every major personal auto insurer has announced rebates of generally 15% to 20% of premiums due, generally for a two-month period. Regulatory and/or political pressure may increase that percentage or extend the period beyond two months.

Workers Compensation: In April unemployment rate reached 14.7%; and was projected by Goldman Sachs on May 13 to peak at around 25%. Fewer workers mean lower workers comp premiums. Goldman does predict the unemployment rate will improve significantly by the end of 2020 to around 10% -- good news for the people getting those jobs, but a long way from the February 2020 unemployment rate of 3.5% https://www.bls.gov/news.release/pdf/empsit.pdf

Homeowners: The number of exposure units are likely to be flat through the end of 2020. Many insurers are offering grace periods for unpaid premiums. However homeowners who remain unemployed for an extended period may have to suspend payments and have their policies cancelled.

Commercial Insurance (all lines): A May 2020 report by Marsh (a sister company of Celent within Marsh and McLennan Companies) reported a sizable Q1 2020 14% composite insurance pricing change. https://www.marsh.com/us/insights/research/global-insurance-market-index-q1-2020.html There are arguments to be made on both sides of the questions as to whether price increases will continue for the rest of 2020.

Losses
Personal Auto: The frequency of losses has dropped substantially due to shelter in place orders, rapid adaption of work from home corporate policies, and growing unemployment. The severity of losses is harder to judge. There are reports of vehicles that are on the roads driving at greater speeds, which could lead to greater loss severity when accidents do occur.
Workers Compensation: An NCCI Research Brief published in April 2020 gave a very broad range of estimate of COVID-19 related workers comp costs – from a fairly manageable $2.7 billion to a very large $81.5 billion. https://www.ncci.com/Articles/Pages/Insights-COVID-19-WorkersComp-Modeling-Potential-Impacts.pdf

There are also legislative proposals in a number of states to presume that any COVID-19 illness of first responders and health care workers is employment related and therefore covered under any workers comp policy.

Business Interruption: Nearly all (but not 100%) business interruption policies explicitly exclude losses caused by viruses and bacteria. However, in a number of states legislation has been introduced that would in effect nullify that exclusion. Insurers are sure to take legal action against any such proposals that become law. In addition, a great many individual and multi-plaintiff suits are being filed for coverage. There are reasons for guarded optimism that the proposed state laws will not take pass (or will be successfully fought in the courts). And also that insurers will prevail in most of the lawsuits brought against them by plaintiff attorneys. However, the United States is a big country, with many kinds of courts and juries; so there probably will be some business interruption losses.

Other lines, including General Liability, D&O, Cyber, Event Cancellation Medical Professional Liability: There is no question that there will be additional COVID-19 losses in these and other lines. At this time, there is no clear consensus on the size of these losses.

Expenses and Investment Income
Here are two assumptions: Staff expenses are likely to be stable over the rest of 2020; and reductions in investment income were significant in Q1.

Berkshire Hathaway alone reported group-level unrealized investment losses of $54.5 billion. However, many/most companies will more or less act according to Warren Buffet’s statement in Berkshire’s Q1 10Q, that investment gains and losses “are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses.” https://www.berkshirehathaway.com/qtrly/1stqtr20.pdf. Up to some point, investment losses may also push insurers to raise premiums in order to maintain adequate capital levels.

So the net effect can either be optimistic:

• Overall premiums will be stable.
• Premium reductions in lines such as personal auto will not fully reflect changes in underlying losses. (Workers comp will be an exception)
• Losses will be manageable. Reductions in personal lines frequency will outweigh any increases in severity. Policy exclusions of virus-related losses will be upheld in court and not be invalidated by state legislative actions. COVID-19 losses in other lines mentioned above (D&O, cyber, etc.) will be manageable. (Workers comp could be a worrisome exception.)

Or pessimistic:

• Premiums in key lines (auto, general liability, workers comp) decline significantly due to regulatory or political pressure.
• Losses spike as severity increases outrun frequency decreases. New laws and court outcomes favorable to claimants occur in multiple large premium volume states.

So what does this mean for tech spending? The March 29 webinar had a slide on the outlook for P&C insurance tech spending for the rest of 2020. The slide divided tech initiatives into three groups, each with its own qualitative outlook – GREEN (positive), YELLOW (mixed), or RED (poor)

• Already underway, large and some midsize projects: GREEN
• Already underway, small and some midsize projects: YELLOW
• Not yet underway, new initiatives, especially large and multi-year: YELLOW OR RED

On April 20, I published a Celent Report, COVID-19: Impact on North America P&C Insurers' IT Priorities, Budgets, and Plans.
T he report (available to Celent research subscribers) presented findings from a short survey of North American P&C CIOs. The findings were broadly compatible with those of the March 31 webinar. So, based on what we know now (mid-May) about the P&C industry’s aggregate financials, here is how I would change the color-coded outlook under each view:

The optimistic view:

• Already underway, large and some midsize projects: still GREEN
• Already underway, small and some midsize projects: mostly YELLOW, some GREEN
• Not yet underway, new initiatives, especially large and multi-year: a bit more YELLOW, a bit less RED

The pessimistic view:

• Already underway, large and some midsize projects: still mostly GREEN with some YELLOW
• Already underway, small and some midsize projects: split YELLOW and RED
• Not yet underway, new initiatives, especially large and multi-year: less YELLOW more RED

So how will the rest of 2020 turn out? The truth is no one knows. To paraphrase an old saying: Hope for the best, prepare for the best, and the worst, and maybe some point in between.