Recent disputes between insurers and policyholders over the scope of coronavirus-related business interruption (BI) policies have highlighted the dangers of a mismatch between insurers’ expectations and those of their customers, says Moody’s.
The rating agency is predicting that EMEA insurers will need to focus on product innovation and risk prevention in the wake of the pandemic, after controversial issues such as BI coverage showed that many firms were falling short of customer expectations.
A related challenge for the industry is how to meet customer demand for protection against risks that are becoming more difficult to insure, while also reducing the existing protection gap between total and insured risk, analysts noted.
Moody’s expects this challenge to grow significantly over the next 30 years as rising physical climate risk makes it increasingly expensive to insure properties in certain regions.
Similar considerations apply in the area of cyber risk, where Lloyd’s of London estimates that over 90% of losses in a severe cyber stress scenario would not be covered by insurers.
These issues will likely take centre stage for European insurers now that the majority have passed through the worst of the COVID crisis relatively unscathed.
Other areas that will command attention include the customer shift to digital channels, and a possible increase in M&A activity as some insurers seek to adapt their business models.
“Pandemic-related lockdowns have encouraged customers to interact digitally with their insurers, and we expect many to stick to these new habits,” Moody’s stated. “Insurers that are slow to adapt risk losing ground to proactive peers, or to technologically savvy new entrants. Increased reliance on technology will increase the sector’s exposure to cyber risk.”
At the same time, coronavirus-related interest rate cuts have increased asset risk, and put insurers under pressure to enhance their portfolio yields by investing in lower-rated securities and illiquid assets.
And the experience of a global pandemic has also heightened concern over climate change and social risks, in particular those association with claims amplifying litigation, which will likely support commercial P&C price increases through 2021.
On the climate side, Moody’s expects re/insurers to redouble their efforts to limit their climate risk exposure, following an intensification of policy action to rein in carbon emissions and a growing regulatory focus on the financial risks of climate change.