The Coronavirus crisis in the CEE insurance markets: hoping for the best, preparing for the worst
By Daniela Ghetu
The CEE countries were not spared by the Coronavirus outbreak. Yet, for the time being their situation in pandemic statistical terms seems less dramatic than in the Western Europe. At the time this article is written, the 16 countries considered in the CEE group have reported a grand total of about 13,870 confirmed cases of coronavirus disease which is 5 times less than in Germany or about 8 times less than in Italy or Spain. Yet, as the first cases were recorded in the region at the end of February, about one month after the Western Europe, the less gloomy picture may be just as well the result of these countries finding themselves at an earlier stage of the crisis and/or of timely undertaking mitigation measures based on the lessons learned from the countries were the crisis started earlier.
Regardless of the potential future developments, it is already obvious that the Coronavirus crisis will go far beyond a health one, most probably pushing the region’s economies into recession. According to ERSTE Group’s analysts, the average gross domestic product (GDP) of the CEE region is expected to shrink by 4.7% in 2020, the most affected being the tourism-oriented countries such as Croatia and Slovenia where the economy could overall shrink by 6.5 – 7.5%.
In the span of a few weeks entire economic sectors have shut down almost completely in most CEE countries – the hospitality industry was among the first hit, followed shortly by all sorts of businesses that entail the presence of numerous people together: retails shops, other than the ones providing for essential goods, events organizing, car rentals, freight transport … up to an almost endless list. All businesses able to proceed with their operations in a remote work regime have put a lot of effort in organizing their employees to work from home. Also, lots of business, especially in the retail commerce, have migrated in the online environment. Where possible, work continued “on site”, entailing extended preparations for providing an as safe as possible environment.
None of the above are only specific for the CEE countries, but the social economic impact may be harder than in the Western economies as the states in the region have less resources to help economic agents resist throughout the crisis. As a result, insurers’ business across the region will also be impacted significantly. Clear indications of the impact that the Coronavirus crisis will have on the insurance industry are already here.
The first actions taken by insurers across the region were to protect the health of both customers and employees by shifting to online means of interaction as much as possible. A significant part of the players in the region already had in place mobile apps or other digitalized systems of claims handling, as well as online sales facilities. Even less digitalized companies have very quickly adapted to the situation and set claims handling procedures that allow customers avoid visiting the insurers’ offices.
Supervisory authorities in the region have adopted similar social distancing methods, yet assuring permanent contact means with customers and supervised entities, as well as a continuous flux of information. To maintain the sector’s financial stability, EIOPA – the European Insurance and Occupational Pensions Authority has recommended insurance companies to “take measures to preserve their capital position in balance with the protection of the insured, following prudent dividend and other distribution policies, including variable remuneration.” National authorities have adopted this recommendation and in many countries already called upon re/insurers to suspend the payment of dividends from accumulated profit until October 1st, 2020 and not to undertake any irrevocable commitment to pay out dividends. In Croatia, the local market watchdog went even further: it has banned local insurers to pay dividends from realized profits until April 30th, 2021, thus retaining in the country about HRK 4 billion (~EUR 526 million) of earnings. On the other side, national authorities will show more flexibility regarding the timing of supervisory reporting and public disclosure of their 2019 and 1Q2020 results.
What is to expect in business terms for the CEE insurance markets?
No doubt, we will witness lowering business volumes all over the region. To what extent, it is yet to soon to predict. Many are already talking about a possible deeper fall than in the previous financial crisis, in 2009.
Yet, one should also take into consideration that we are only a few weeks in this new situation. In many countries across the region it is not yet clear how effective the state aid for people and businesses will be and, thus as far as the customers are concerned, both retail and corporate ones are inclined to adopt an over restrictive behavior trying to preserve their financial resources as long as possible. As such, we expect that after the first shock will fade, the consumption behavior will also stabilize at a reasonable level.
In life insurance, a large part of the business is related to the banking loan contracts that have attached a life insurance guarantee; it is expected that the lending activity will slow down in the following months, so not much business will come for the life insurance sector. We may also be witnessing a wave of lapses of capital accumulation insurance policies (UL and not only), as some insureds will face financial difficulties and will “freeze” or even drop policies. As there are very few life insurance products covering the Covid-19 risk, the direct impact of the pandemic on life insurers’ expenses will remain, in our opinion, insignificant.
Motor insurance, that makes up the largest part of the non-life business in the region, will face both positive and negative effects. On the positive side, the “empty” roads across the region will provide for a visible decrease in the number of claims following road incidents, which may help improve the technical result on this business segment, provided that underwriting will not experience a sharp fall.
On the negative side, there are a series of factors that may have a negative impact on written premiums:
- One of the main sources of new business is cars sales financed through leasing arrangements of banking loans; given the volatility affecting incomes, it is expected that car sales will stall or decrease, affecting both the Motor Hull and MTPL line.
- With the transport restrictions imposed by the Coronavirus outbreak, the largest part of the goods carriers’ fleets remains inactive; many carriers have already asked if not for their insurance contracts being frozen, at least for postponing premiums payments. Some countries in the CEE – as Poland, Romania or Croatia -, are the home countries for large carriers, with thousands of trucks registered, as the operational costs are lower than in the Western countries, while the EU rules allow them to operate all over the Union regardless the member country were they are registered;
- In some countries, as Romania, purchasing MTPL for short periods is allowed; as a result, a large share of the active MTPL contracts is formed by policies with a one month duration, which means that they will soon expire and may be not renewed as long as the special measures are in place;
- Despite the corrections applied during the last years, MTPL prices are still low in the CEE markets, which leaves a very narrow margin for insurers to offer their potential customers better deals to stimulate take-up;
This being said, insurers will have to fight to preserve profitability on the motor insurance lines. In some markets, as Romania or the smaller markets of the Adriatic region, motor insurance lines’ profitability is already an issue because of other operational reasons.
Finally, on the P&C lines (other than motor insurance), we will most probably see the impact of the economic downturn. In particular, small and medium businesses hit by the current crisis will form a market segment in distress. Hopefully, no major Nat Cat event will hit the region in the following months, thus sparing the region from an additional stress. Yet, the recent example of the 5.7-degree earthquake that has hit Croatia, right after the country’s lockdown, shows that a risk accumulation scenario is possible at all times.
On the Coronavirus front
Besides all the measures taken to preserve their functionality and allow servicing clients as best possible, insurers across the region are also trying to come to the aid of their clients and contribute to the general effort to fight the Coronavirus.
Donating medical equipment or raising funds to help hospitals or other bodies involved in the emergency situation management, setting call centers within the health insurers’ structures to help people get information or remote medical consultations, are actions that many insurance company across the region have already got involved in.
In several countries, the insurers’ associations are studying solutions that may help customers by extending coverages or allowing flexible/delayed payments of the premiums etc. In some markets authorities have eased to a certain extent the solvency criteria or the financial obligations of insurers toward the market bodies. Yet, insurers still need to comply with the EU solvency rules, meaning that they need to carefully analyze the impact of any kind of additional coverage they might wish to grant their insureds to support them throughout the crisis. For those belonging to multi national groups, this issue is even more delicate as any “favor” that a local subsidiary may afford to grant with a low impact on its business, may become an unaffordable precedent in other EU markets, with a higher exposure.
Finally, one should also not ignore the reputational risks that insurers are confronted with. In countries where the financial education is still significantly lower than in the mature markets, when it comes to the pandemic risk not being covered by the business interruption clauses, or travel insurance products etc. may rather be interpreted by the public as malevolence than as a natural limitation of the insurance industry of undertaking risks. While the current crisis may raise awareness for the future, on the short-term companies need to fight such a public perception by doing their best to support clients, even at the expense of profitability, if necessary. It might be a much-needed sacrifice to allow for future growth.