Predicting the pandemic’s impact on an industry built to protect against it
Covid-19 has certainly been a wake-up call for almost every sector, but the insurance industry is in a particularly precarious position. There is little clarity on whether the pandemic will amount to a blessing or a curse for insurers, but one thing seems certain: Covid-19 could be the digital reckoning this industry has always needed.
Murkier still, however, is Covid-19’s effect on insurtech startups, which operate in very different ways from the incumbents. According to Harshet Lunani, Co-founder of Jakarta-based Qoala, the pandemic could wind up being a blessing for insurtech as traditional insurers seek to digitize, and may even open up niches for new Business-to-Business (B2B) solutions providers to enter the market.
A mixed bag with many variables
In the early days of the pandemic, the insurance industry saw Covid-19 as an opportunity, Lunani says. Global health crises naturally spark greater interest in health insurance, meaning dollar signs for the people selling policies.
However, crises like this also mean an increase in claims–a phenomenon that global ratings agency Fitch was quick to point out when it downgraded the U.S. life insurance outlook from stable to negative in March as Covid-19’s mortality rate began to rise.
While this conclusion seems clear-cut, albeit morbid, there are somewhat paradoxical predictions for other insurance sectors. Auto insurance, according to Insurance Business Magazine, is a mixed bag: though there might be fewer policies taken out due to wide-scale unemployment, there might also be fewer claims made as less people are on the road.
Amid these jumbled-up predictions, the World Health Organization (WHO) then made an announcement that flipped the game yet again: it officially gave Covid-19 pandemic status.
“A lucky thing or unlucky thing, depending on which side of the table you sit on, is that Covid-19 was announced as a pandemic,” Lunani says. “And once it becomes a pandemic, usually it falls on governments to provide support, not insurers. And hence in many countries, actually, insurers have not been paying out for Covid-19.”
But health isn’t the only thing people are looking to insure. Event cancellations and business interruptions, for example, are other areas that have forced insurers to issue massive payouts. The Wimbledon tennis tournament had been paying around US$1.9 million a year for pandemic insurance following the outbreak of SARS in 2003, and this foresight paid off in 2020, as the organizers are entitled to a $142 million payout.
A few other sporting tournament organizers managed to come away relatively unscathed financially, but those hoping to invest in similar policies next year are in for a disappointment. Reuters reported in early July that pandemic insurance has either become completely unavailable or become astronomically expensive, with upfront premiums of up to 50% of the amount insured.
Meanwhile, the effect of the novel coronavirus on insurtech startups may be closely linked to the business model and target market. A March 29 article on InsuranceThoughtLeadership.com suggests that digital native insurtechs like Lemonade will be “well-positioned to thrive when the virus subsides” as insurers transition to more digital forms of operation. Almost prophetically, Lemonade’s early July IPO saw the company’s shares finish up 139% after the second day of trading.
Moreover, startups on the B2B side of insurtech may also see opportunities opening up, particularly in terms of collaborating with traditional insurers.
“[Insurers] don’t believe this is a short-term thing, where once Covid-19 goes away, normalcy will be resumed. They actually do believe that Covid-19 may have forever changed the way they will work. It’s definitely sort of the new dawn,” Lunani says.
The new face of the digitally-transformed insurance sector
Few industries have escaped the avalanche of content on how the spread of Covid-19 has made digital transformation the utmost priority for the coming years, but for insurance, where Lunani says many processes are still offline, this change is particularly urgent. That said, he adds that the human touch is still an important component in the sales process.
“Even in the most advanced market, from our observation and understanding, insurance is not going fully digital,” he says. “There are digital aspects to it, but it does feel like one of those services where people want human interactions as well.
To that end, Lunani’s startup Qoala is a multi-channel insurer, working with partners to offer more complex products, and going direct to consumers with small offerings like phone screen insurance.
One Accenture paper on how insurers ought to operate going forward repeatedly emphasizes digitization and the use of AI, stating that processes should be optimized using a “Human + Machine mindset.”
Although such findings are likely to set the stage for how traditional insurers approach digital transformation, it can’t be denied that the cost and time involved in building out sophisticated data analytics, AI, and remote working processes are significant. This gap may be filled by startups, as they are nimbler when it comes to developing and launching new products, and using technology to modern their operations.
“Insurers are definitely becoming more focused on digital; Covid-19 has in a way helped that for sure. And therefore, it’s more of an opportunity for us to collaborate with them,” Lunani says.
Branching out in Southeast Asia
All the messages coming out of the insurance sector are well and good for more developed insurance markets, but in Southeast Asia (SEA), it’s all about trying to seize the first-mover advantage.
Like other emerging markets, SEA has a lower appetite for financial products like insurance as compared to developed economies. The notable exceptions are Japan and South Korea, the latter of which has an insurance penetration rate of 11.9% in 2018, compared to the region’s average insurance penetration of 3.8% in 2018 for life insurance, and 2.1% for non-life products (EY).
Lunani says that developing products in the region is the difference between fighting for market share on an existing battleground, and creating something new which can be scaled up. SEA is currently seeing much more of the latter, which despite seeming more palatable than a price war for market share, comes with its own challenges.
“It will require more investment into customer awareness; it will require investment into brand building; it will require more investment into making the right kind of new products, which can give the experience required to make consumers understand insurance,” he adds.
Lunani also suggests that the pandemic could be a wake-up call for small businesses and tech startups in Southeast Asia, predicting that insurance for this sector will soon see a boom.
“A more planned approach will give you more sustainability in bad times, which I think is a learning for small businesses,” he says. “And I do believe that sector will now come into its own in SEA, because that sector has been traditionally underinsured and has been hit very badly by this.”
In an industry which relies on calamity to sell itself, the Covid-19 pandemic has been a double-edged sword. In the years to come, traditional insurers’ approach to digitization and insurtech startups’ approach to reaching consumers may re-draw the battle lines for a new generation of insurance products.