All industries in South Africa have been rocked by the alarming increase in the COVID-19 infection rate.
The financial soundness of insurers will be tested the most during the current lockdown period, but even more so once the lockdown has been lifted and the dust settles – what kind of state will our economy be in?
What might have been the Black Swan scenario in the past, is now our reality.
The question that the boards of insurers should be asking themselves is; whether COVID-19 has led to material changes to an insurer’s risk profile.
“The Prudential Standard GOI 3.1 requires insurers to conduct an own risk and solvency assessment (ORSA) annually, when the insurer’s risk profile changes materially, or when directed to do so by the Prudential Authority.”
The purpose of an ORSA process is to enable an insurer to understand and manage potential risks and associated controls. An ORSA’s purpose is to assist management and the board to make informed strategic decisions that impact the insurer’s risk profile. In the wake of COVID-19, risk profiles will be in flux, making it difficult to make vital decisions.
An ORSA should be treated as a process, and not simply a report. It is a process that assists management in monitoring regulatory capital, refining business planning and strategy, define its capital needs and have a full view of its risk profile, risk tolerance limits and impacts on the business strategy.
Due to the change in insurers’ activities and operations, the following risks might need to be considered:
- An Increase and change in operation risk due to services provided off-site and an increasing reliance on IT systems and controls
- Transferring of data and the risk of data theft, including confidential client information, is increased
- Vulnerability caused by systems and controls that are not sophisticated enough to prevent system hacking and to detect fraud resulting from an increase in remote working
- Credit insurers will face an immediate drop off in new clients and short term insurers a reduction in required coverage and thus premiums
- An increase in death claims together with a possible increase in unpaid premiums
- Underwriting decisions on life insurance might be outdated, with the highest risk for those insurers that focusses on the lower LSM market. Current premiums do not take account potentially higher mortality rates
- The loss of value in listed investments and potential future investment returns (dividends) that could impact negatively on solvency capital requirements.
A multi-disciplined approach will be required to reduce the risk.
For operational risks, the Head of Risk and IT must work closely together to mitigate risks.
All outsourced service agreements must be scrutinized to ensure that a change in operations doesn’t expose the insurer to any external unidentified risks. Service providers will need to be brought on-board and their contingency plans outlined and approved of by the Risk team. To provide the board with additional comfort and alleviate pressure from management, it is advisable to contact a professional services firm or utilize internal audit to review controls as a matter of urgency.
The loss of business, drop-off in premiums, change in risk profile and loss of investment value should be addressed by the Head of the Actuarial function.
New models and various stress scenarios need to be modelled to enable management and the board to make informed decisions. Once this is done, an independent expert can review and interrogate the results.
What insurers should take away from the current situation is the realisation that an over-reliance on direct traditional sales channels and insufficient technological advancements can have crippling effects on the business’ risk profile.
Insurers will have to remain agile, as with most other businesses during this epidemic. The long-term effect of the current crises will be felt long after the virus have gone. Insurers may have to relook at their product offerings and pricing models to remain relevant and to continue as a sustainable business.
Working closely with your advisory firm, your regulators, as well as Government, will be an insurer’s best chance of surviving.
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