COVID-19 impact | Insurers may need to consider potential impairment of non-financial assets: PwC

The COVID-19 outbreak, which is turning out to the biggest disruption that the global insurance sector has ever seen, may force insurers to consider the potential impairment of non- financial assets.

A PwC report said that temporarily ceasing operations or suffering an immediate decline in demand or prices and profitability are events that indicate impairment.

“The accounting standards require that all non-financial assets be tested for impairment whenever there is a likelihood of them being impaired. The COVID-19 pandemic is challenging for the health insurance industry on various fronts; at the same time, it represents an opportunity. Health insurance is expected to cushion the blow that this pandemic will deal,” said the report.

Insurers have seen a slump in sales due to the lockdown and due to the uncertainty around jobs and income flow. Traditionally since insurance has been a push product, there has been a 20 percent overall decline in sales for the sector ever since the March 25 lockdown was announced.

Impact on general insurance

The PwC report said that the current crisis is already emerging as the single largest global insurance event, surpassing years when three or more large cyclones occurred and the financial crisis of 2008.

Prior to this, the largest ever loss in a single year was in 2017, which saw an economic loss of USD 337 billion of and an insured loss of USD 144 billion caused by hurricanes Harvey, Irma and Maria and wildfires.

As per an estimate by the Lloyd’s insurance and reinsurance marketplace, which estimates the global claims payout to be in the range of USD 107 billion in 2020 alone, with a caveat that it might increase in case the global lockdowns extend to the third quarter. Moreover, due to the fall in investment returns, Lloyd’s also estimates a fall in investment reserves to be in the range of $96 billion.

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Within general insurance, the PwC report said that challenges faced by the motor insurance segment would include lack of purchase of new vehicles as well as claim surveying.

However, the report also said that very few vehicles have been plying due to the lockdown leading to lower accident expectations and low claims on existing policies. It also added that social distancing could also become a new norm leading to lower demand for commercial passenger vehicles. But low-end cars and two-wheelers sales could gain, added the report.

Among other segments, the report said that commercial property may not see too many fire claims, but they may be hit by the 30-day non-occupation clause. The PwC report said that this clause is likely to become a source of dispute in terms of whether this absence should be overlooked by insurer or not.

Impact on life insurance

The PwC report said that long-term guarantees will look attractive, but insurers will face constraints in continuing to marketing these products as interest rates plummet. Moreover, people may also start valuing liquidity and hence, there could be stress on long-term pension products.

While there is a demand for term plans, PwC said that unstable cash position of people could lead to a reluctance in buying a higher cover. Further, it added that higher covers bring in medical tests, which people will be reluctant to do amidst the pandemic.

Overall, the PwC report said that the buyer-seller trust deficit has to be bridged now, and insurers have to understand the behavioural economics of this aspect.