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Covid-19 has grown into a global pandemic in a matter of weeks. And it's still unknown how the situation will develop in the near or mid-terms. In addition to the crisis in the global health care system, it is fueling contradictions that have long accumulated in the global economy, as well as serious problems for global supply chains and most of the sectors of global economy. International and national liquidity regulators, including the Federal Reserve and the ECB, have responded by lowering interest rates.
In this article and series of the following articles we will focus on new realities in which the Insurtech market exists due to the pandemic and new wave of global recession.
New realities of the money market
In March 2020, the Fed Open Market Committee (FOMC) lowered the range of federal fund rates from 150 basis points to 0.25 percent, while the Bank of England Monetary Support Committee (MPC) lowered its bank rate from 0,75 to 0,10 percent. The main rates of the ECB and the Bank of Japan remained unchanged. The ECB has expanded its quantitative easing program. It should also be noted that the situation, preceding the crisis of 2007-2009 and relatively low Fed balance level were both referable for the purposes of regulating macroeconomic situation and they both provided regulators with the level of free space for maneuver. A return to the policy of asset repurchase from the market attracting to the existing and rapid expansion of the already record-breaking large balance regulators.
After the global financial crisis of 2007-2009, asset purchase programs became one of the main elements in the arsenal of central banks, especially due to the low rates close to zero. It’s worth paying attention to the fact that at the current stage the Fed purchases assets very quickly compared to previous episodes of direct buyback programs: as at the end of March, the volume of purchasing assets was 75 billion USD, while in April this volume exceeded 15 billion USD a day. The Bank of England voted to purchase a total value of £ 200 billion ($ 250 billion) assets from the market. On March 12, the ECB's Governing Council announced its response to threats, created by the COVID-19 for the global economy: a buyer's package worth $ 120 (131) billion USA (Euro).
On the March 18, ECB began to operate in accordance with the emergency plan (PEPP) which total amount equals 750 (820) billion euros. The Bank of Japan similarly increased purchases of Japanese government bonds (JGB) to 80 trillion yen ($ 743 billion) per year. According to the program announced by the Bank of Japan, the volumes of purchases of commercial papers and bonds were increased, as well as the volumes of purchases of stocks (ETF) and stocks at the Japanese real estate funds (J-REIT).
As a result, global markets received unprecedented in terms of volumes (taking into account the rate of increase in volumes) replenishment of free liquidity. Which in the long run can become a factor stimulating investment demand (in the context of a consumer decline).
In the matter of loss management for non-life insurance products, it should be mentioned that most insurers learned from the outbreak of SARS in 2003 and included provisions to exclude events such as infectious diseases and epidemics / pandemics from the number of insured risks in most products not related to life insurance. However, the described rule does not work in the case of a number of major events, the risks of cancellation of which (including the consequence of the occurrence of force-majeure events) were insured. The biggest event of this year is the Tokyo Olympics, according to which analysts estimate that insurance coverage could reach $ 2 billion. It is likely that the reinsurance sector will suffer some of this damage. For example, according to analysts, one major global reinsurer carries a combined risk of € 500 million in case of cancellation of all activities due to a pandemic.
Later in number of other articles of this series, we will examine how the insurance market responded to changes in the global economic situation and assess whether additional incentive measures by regulators can spur investment demand for the assets of this market.
Another insurance segment that has taken record losses during the outbreak of the pandemic is business insurance. According to preliminary estimates by RFG analysts (web: https://en.businesssociety.club/), the average loss ratio for this segment equal to 50% in the normal period increased during March-April up to 70-75%. At the same time, in most Western countries, the largest volume of the total payments of insurers falls to the payment of losses in this segment. For example, in the UK, during the pandemic outbreak 900 million GBP out of 1.2 billion GBP payments in other insurance types (excluding life insurance), were related to claims for termination of business (despite the fact that a record 275 million pounds were paid to customers in the form of insurance claims in travel insurance).
One of the fastest-growing segments in terms of aggregate payments is the segment of business insurance against downtime. Collectively, small businesses lose $ 255 to $ 431 billion in monthly revenue as a result of the pandemic, while monthly insurance premiums for commercial real estate insurance are $ 6 billion, according to the American Real Estate Accident Insurance Association. Finally, volatility and falling interest rates in financial markets are likely to have a significant impact on insurers in terms of projected earnings and their overall solvency. Worldwide, business insurance
companies manage assets worth more than $ 20 trillion, and half of them are estimated to be in government bonds. With a decrease in the yield of 10-year US bonds since the end of 2019, the average coupon yield of insurance companies has more than halved by about 15%.
All this leads (in the absence of direct state support) to a significant increase in the loss ratio of business insurance. In the meantime, Congress is considering introducing legislation that would create government support for insurers in a pandemic, similar to the terrorism insurance program created after September 11th. Under the bill, the federal government will cover industry losses in excess of $250 million, up to $ 500 billion per year. Participating insurance companies will be awarded an annual premium.
Another segment of insurance, which, on the one hand, has been significantly affected by the crisis, but for which a new paradigm can become the strongest driver of long-term development, is the travel insurance market (including products such as insurance against cancellation and delayed flights, lost or damaged luggage, etc.). A recurrence of similar pandemics in the future, with the sad state of virology and bacteriology around the world that we observe is inevitable. Accordingly, the risks of mass flight cancellations will also grow. According to the results of March-April, the average loss per person from the cancellation of flights amounted to about $ 849 (according to RFG, web:https://en.businesssociety.club/). With an average policy cost of $ 8-15, such insurance in the long run becomes something inevitable. According to our assumptions, significant changes can occur in the structure of demand for certain types of travel insurance policies.
At the moment (before the pandemic), the most common type of policies in the travel insurance segment were policies, providing protection against cancellation due to the scope of cases mentioned in the policy. This type of policy is significantly cheaper (from 7% to 9% of the cost of the trip), but, as the name implies, covers only the risks indicated in the policy. In the long run, we believe that the aggregate demand for such products will be redistributed into the segment of insurance against cancellation of flights due to all reasons possible (i.e. general insurance, the cost of such a policy ranges from 10% to 12% of the cost of the trip).
The main advantage of such general travel insurance policies is that if the client refuses the trip (regardless of the reason for the refusal), the policy guarantees that at least 75% of the money will be returned. According to AardvarkCompare, the demand for such solutions may increase from 5% to more than 50% after a pandemic. In some countries, this already makes up the majority of travel insurance sales. For example, in Germany Reiserücktrittsversicherung is the most popular type of insurance. A number of insurers at the same time slightly reduced the percentage of reimbursement for similar products.
Despite a general drop in consumer demand and a decrease in the intensity of travel in the longer term, we maintain a positive outlook on the future dynamics of this sector. According to a report published by Allied Market Research, in 2019 the global travel insurance market reached $ 19.24 billion, and by 2027 it is estimated that it will reach $ 37.0 billion, representing a CAGR of 8.6% from 2020 to 2027 year. However, insufficient awareness of travel insurance policies holds back market growth. With the expansion of the product line and the addition of services to the general list, along with technological advances in the tourism industry, new opportunities will be created in the upcoming years.
Based on insurance coverage, the one-trip travel insurance segment accounted for more than two-thirds of the total market in 2019 and is estimated to maintain its dominant share in terms of revenue over the forecast period. According to Oval (web:https://oval.global/), the average forecast CAGR of this segment will be about 11.9% from 2020 to 2027. According to our estimates, speaking of sales channels, the most significant market growth will be observed in the segment of insurance aggregators (CAGR will be 10.7% from 2020 to 2027). From the end-user perspective, the family voucher insurance segment by the end of 2019 took the highest share with more than one fourth of the total travel insurance market value and will retain its leading position by 2026. However, the business travel segment is expected to show the fastest
CAGR of 10.7% between 2020 and 2027.
In the next article of this series, we will examine in more detail the impact of the pandemic on the car insurance market.