Coronavirus – Insurance post lockdown

May 1, 2020

Our time travelling colleague checks in from 2022

One of the most common questions the Oxbow Partners team was being asked by clients back in spring 2020 was how the world was going to look post lockdown. We shared our views, of course, but the reality was that all strategy consultancies – us included – were just gazing into a crystal ball. The smarter consultants suggested scenario analysis as a way to support corporate planning in times of extreme uncertainty – everyone’s heard of the Shell approach – and I’m pleasantly surprised about how accurately we identified many of the trends that I can observe today.

Anyway, now that lockdown is two years behind us, I thought it would be helpful to share a few of the trends that played out and affected insurance.

A scramble for motor insurers

I remember when politicians started talking about easing lockdown back in spring 2020. Well, it turned out that the end wasn’t in sight as we had hoped. Various forms of lockdown lasted for a whole year more in the UK and elsewhere. Life is still not fully back to the pre-Covid normal actually.

For example, flying still feels like a novel experience. Whilst some airlines like Ryanair were aggressive about restarting their fleets in the summer of 2020, most are still operating a limited schedule and don’t expect to be back at 2019 levels for several years. Flights are more expensive as a result which has crushed the weekend city-break market for the urban middle classes and seriously reduced the lower end holiday market – I don’t envy that couple who bought Thomas Cook’s UK stores last October.

This was bad news for motor insurers. After a honeymoon period in spring 2020 during which road traffic fell to levels that had not been seen since 1955, road traffic quickly rebounded. There were many reasons. For example, many of the 16.7m Britons who commuted by car in 2019 are back at their place of work at least part time and they’ve been joined by new motor-commuters who are avoiding public transport. And then there’s those who have shifted their holidays from Dubai to Devon.

There were many implications for motor insurers. One has been that people started to question the reasonableness of their policy. Apart from the one domestic summer get-away they were allowed by the government in 2020, people hardly drove their cars and got increasingly riled by their insurers’ renewal quotes – especially as domestic budgets tightened through the year. This was only exacerbated by some insurers who had given money back on their previous policy but seemed to be earning it all back at renewal.

So nowadays people think about how often they actually drive their car and want to pay only when they drive. Usage-based policies that are tailored to individual circumstances have had a massive surge in popularity, as Oxbow Partners predicted they would at the time as it happens.

It has been a challenging time for insurers, not least because the FCA has been on their backs about product value for some time now. The risk profile of drivers has changed and new products have quickly gained traction. Some insurers were able to move quickly and update their pricing to capture these effects, others are still catching up. It reminds me of the early 2000s when aggregators emerged and industry profits skewed heavily towards those players who understood the specific dynamics aggregators were creating. I guess the point is still that there’s not a lot of excess underwriting profit in the motor system – any new product is really just a way to arbitrage the market leaving the laggards with the underpriced risks.

Home insurance has become leaner

People talked about smartphones breaking down barriers between the business and private sphere – but Covid has really obliterated them.

Whilst most people are now back at work, the laptop classes are still spending a lot more time working from home than before. There are a few reasons – lingering concerns about sporadic Covid outbreaks, lifestyle choices, and of course the fact that all the reasons that companies citied for it being impossible in the past have been shown to be untrue. Organisations feel much more virtual these days which has led to some interesting management challenges.

This has changed the loss profile of home insurers. Theft and major escape of water claims are down as people spend more time at home, but accidental damage and fire losses are up. Insurers are still trying to understand the long-term rating trends here, but the consensus view is that higher occupancy has reduced large losses with minimal impact on frequency.

This has not actually been great news for insurers. Premiums have come right down given the claims performance and some of those people affected by the ongoing recession have stopped buying home insurance at all. The fact that home sales dropped off a cliff in spring 2020 and that the market was slow to recover has killed the mortgage-linked new business market too.

There have also been some interesting effects on product design. The convergence of the business and private spheres has, for example, led to small businesses keeping some if not all of their stock at residential addresses. This has led to some inflated claims or coverage disputes. It’s hard to explain to customers that some things in their house are covered by contents insurance but not others. Home insurers now tend to ask about working from home in much more detail than in the past, and offer various product extensions.

Occupancy rates have also had an interesting impact on product innovation. Back in 2019, home insurance product innovation was all about protecting the home when it was unoccupied – sensors like LeakBot for example. But now that properties are occupied so much more, the agenda has shifted to protecting properties when they are occupied. It took some insurers a bit of time to realise that this was quite a fundamental change in focus.

Businesses: A rout for SMEs and a boost for micro enterprises

SMEs were routed in late 2020 and early 2021. Although the extension of the UK furlough scheme to the end of the year was welcome, it soon became apparent that for many it was just a more generous form of unemployment benefit: many of those on furlough never went back to work with their employer. Economics were particularly tough on premised SMEs who had fixed costs but a drastic reduction in revenue. As hopes faded for a V-shaped recovery, Covid moved from being a cash-flow issue to a P&L issue, and there was little these companies could do to save themselves. This has hit many of the incumbent insurers hard – SME had been one of their growth engines over the last few years.

Micro enterprises on the other hand have flourished. They were able to weather the storm given their low fixed costs – owners just had to lie low for a few months. In fact, many laid-off workers have reinvented themselves as freelancers or sole traders further increasing the size of that market. Those offering micro SME products – which includes a lot of InsurTechs – have actually done quite well.

Finally, it’s interesting to consider how buying behaviours have changed. As the Covid crisis started unfurling, there was lots of media attention on businesses rushing to buy pandemic insurance. There was also speculation that people would even start to buy coverage for other niche, low-frequency risks like an asteroid strike or 2-week power cut. What has actually happened longer-term was the opposite. I recently spoke to a CUO who said that not one single customer has asked for a pandemic extension recently. I guess people have short memories.

Back to reality: Scenarios can help inform executives’ thinking

Nobody knows what the short, medium or long term implications of Covid are going to be on the world, let alone the insurance industry. However, scenarios can help executives think through how markets could look in the future and benefit from ‘hindsight’ to determine the right actions today. By bringing these scenarios to life through stories, executives can engage with the content and test their thinking.

If you would like to speak to Oxbow Partners about how we can help you think through your strategic response to Covid, please get in touch.

Also make sure to catch up with our weekly Oxbow Partners Coronavirus Coverage.