21 June 2021
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Interview: Gorazd Čibej, Director of the Insurance Supervision Agency

Discussion about risks, challenges and opportunities in the insurance industry during the coronavirus and in the post-coronavirus world with Gorazd Čibej, the Managing Director of the Insurance Supervision Agency, which is responsible for supervision of insurance undertakings, insurance agencies, insurance brokerage companies, insurance agents and insurance brokers in the Slovenian market.

Author: Jan Tomše
Photos: Uroš Hočevar/DELO

Can you give us a general overview of the most immediate, most detrimental risks in the insurance market? 

The biggest risks remain market and macroeconomic risks. The high market risk is due to the volatility of stock indices in world markets and the volatility of government and corporate bond rates. One of the biggest problems that insurers face are low returns on capital markets, meaning that yields for the next 20 years are likely to remain negative. Given the current uncertainty and forecasts of the general macroeconomic indicators, a reduction in these risks in the short term is not expected. Furthermore, the epidemic and the consequent transition to work from home have increased operational risks, especially cyber risks. Recent global attacks have shown how exposed we are to online criminals and insurers are increasingly responding with products to protect their customers. However, providing insurance against cyber risks is complicated. Unlike natural catastrophes, cyber risks have no geographical boundaries. This raises questions of accumulation and aggregation, and is one reason why insurers tend to be overcautious regarding cyber risks. A key factor limiting the development of cyber insurance solutions is the lack of data available for insurers to analyse. This makes cyber risks difficult to understand and price. Therefore, if policymakers wish to shift risk away from society, they must provide information on the nature of cyberattacks available on an aggregate and anonymised basis. This would enable insurers to refine the protection they offer to clients. In terms of the Slovenian market, at the time of the outbreak, the risks of profitability and solvency of insurance companies increased, however they still remain relatively low  Similarly, the liquidity risk for the insurance sector remains low.

What has been, so far, the major impact of the pandemic on the insurance sector?

In the insurance sector, the most obvious potential impact of the Covid-19 pandemic is an increase in insurance claims from death, hospitalisation, events cancellation and business interruption cover, among other eventualities. Yet, these have not significantly affected insurers’ solvency so far. However, this may be due to delays in claims submission because of restrictions on movement, exclusion of pandemic events from insurance contracts, protracted loss adjustment process or diversification effects (eg. higher insured death pay-outs being offset by lower annuity payments or lower claims from motor insurance). In some emerging market economies, low insurance penetration rates mean that most of the financial losses are not covered by insurers. Volatile financial markets and the global economic downturn have had a greater impact on insurers, particularly life insurers, due to large holdings of fixed income securities and, correspondingly, exposure to fluctuations in interest rates. The ultra-low interest rate environment could depress the insurers’ solvency position, particularly those with mismatched asset-liability profiles. A global economic recession, which is becoming increasingly likely, might affect insurers in several ways. These include, for example, lower demand for insurance products, higher surrenders of certain life insurance policies (that may give rise to liquidity pressure) and increased market and credit risk exposures from investment portfolios.

How can the regulatory authority help preserve the market’s solvency and quality of services in the difficult environment created by the health crisis?

The role of the insurance market regulator is to monitor and preserve the profitability and solvency of the insurance companies as well as to control market conduct and to prevent unfair trade practices. In the difficult market conditions, which arose from the COVID-19 outbreak, the insurance market regulators need to strengthen their activities in order to be able to react promptly to the new challenges, to safeguard the market solvency position and to protect the policyholders. The supervisor must take care of the market in all situations and, especially in emergencies, the supervisor must pay special attention to consumer protection. The supervisor should be reasonable if the insurance companies have problems with the accuracy on the reporting side but should be very careful in the field of consumer protection. Insurers should thus be seen as part of the solution and not part of the problem. Let me give you a concrete example from the Slovenian insurance market. In the spring, access to insurance companies was limited to electronic channels, which. despite all the positive effects in terms of efficiency, is still a major obstacle and challenge for many policyholders, especially the elderly. Hence, Slovenian insurance companies adjusted their operations in accordance with the restrictions adopted by the government due to the lockdown. Insurance companies also later maintained a high level of accessibility through electronic channels and very quickly adjusted operationally, so that they were ready for the second lockdown. Insurance companies started to introduce innovations faster, so now they have updated business models, which means it is possible to communicate with customers electronically, if the customer so wishes. In the future, if it is necessary to comply with the restrictions even more strictly, this kind of adjustment has proven to be very socially responsible.

How did insurers feel the economic impact of the coronavirus crisis?

Recent events have demonstrated how exposed our society and economies are to the risk of pandemics. While the losses associated with pandemics are widely covered in insurance
lines such as life, travel and event cancellations, as well as in many liability lines (general, medical, professional), in other lines, such as business interruption insurance or Slovenian supplementary health insurance, pandemic risk is considered to be a catastrophic risk that cannot
generally be covered through the existing insurance model in which the claims of the few are shared by the many. Standard insurance policies typically provide protection only against risks that cannot all happen at the same time, as these can be offered at prices that customers can afford. In practical terms, this means that, although specialist and limited markets do exist for this type of cover, insuring a very large group of individuals and businesses against a pandemic cannot be done relying exclusively
on the normal principles of insurance. For this reason, it was so far only possible to cover pandemic risk in specialised insurance policies covering limited situations and with clear cover limits. In a range of non-life policies, pandemic risk is not covered and therefore has not been included in the premiums, and has not been reserved nor has it been considered in setting the solvency capital.
Removing existing limits or providing broad, general cover for pandemic risk is therefore not possible for the insurance industry alone. That is why in the events such as pandemic the joint involvement
of the insurance sector and of the state is of crucial importance. The Insurance Supervision Agency
strives to ensure viability of the insurance market by pre-emptively monitoring economic situation, assessing solvency positions of insurers and providing advice on how to best implement the required measures. Key emphasis is on prompt, timely response in order to reduce the overall impact on all stakeholders. This year COVID-19 crisis showed that prompt measures are most effective. It is important to stress that the current health crisis is not over. The Insurance Supervision Agency continues to monitor and assess the situation and will respond accordingly.

Are consumers visibly changing their expectations towards the insurance providers and roducts (requesting better services or added value features associated with the basic products / swiftness / extended coverages etc.)?

Recognising increased consumer vulnerability in such uncertain times, it is even more important for insurers to pay particular attention to treating customers fairly under current circumstances.
However, the principle of treating customers fairly should not violate the fundamentals of the
insurance business. IT literate consumers are expecting insurance products and services to be
available online, and they expect fast response from insurance provider/distributor. Literate consumers search for products by themselves. They expect digital sales channels to work properly
and fast, so that they can arrange everything from ‘home’, and even get advice, when they need it.
However, less IT literate consumers are not visibly changing their expectations towards the insurance providers and products. They still depend on personal contact with insurance providers or distributors, and their fair advice. Their expectation is basically to trust the insurance distributor. All consumers are more and more price sensitive, so they constantly expect discounts and special offers from insurance providers. They are prepared to change insurance providers just because of lower price or discount or special bonus, sometimes even at the expense of poorer coverage (consciously or unconsciously). The basic expectation of all consumers has always been the same. That is consumers hope they will get what they thought they have bought.

Are there any positives from the adaptation of insurers due to the pandemic?

Every crisis also provides new opportunities as the other side of the same coin. Consequently, changing habits and opinions of customers provides insurance companies with new opportunities
as well. Customers became more health conscious and the importance of risk mitigation has stepped
into focus, increasing the need for health and wellness services, which might indicate growth potential for related insurance product lines. Besides handling customer needs, insurance companies also need to deal with the challenges the coronavirus imposed on their own operations. In many cases, face-to-face administration has become impossible, offices needed to be closed and operations had to be switched to online platforms as employees started to work from home. These novelties required
the introduction and rapid improvement of new digital solutions providing answers not only to clients’
but also to employees’ needs. Many insurance companies in the region highlighted how digitalisation has played a key role in reacting rapidly to the pandemic situation and that they see continuing digital transformation as one of the most important strategic directions for the future as well. As consumers embrace new and innovative digital solutions, the insurance industry continues to strive to meet their expectations and use new technologies to better serve its customers. The COVID-19 pandemic has further emphasised the need for strong and innovative digital capacities in the financial sector. However, it is up to the regulators to ensure an appropriate regulatory framework is in place that enables innovation and allows consumers, established companies and new market entrants,
such as insurtechs, to benefit from the opportunities that digitalisation can offer. This means removing any regulatory barriers that may hold back innovation, facilitating a datadriven financial sector and supporting a greater uptake of new technologies.

What is the greatest impact on consumers and how their attitudes will change?

COVID-19 might just prove to be the catalyst for innovation in insurance, unlocking greater levels of customer experience and personalisation that has long been overdue. As a result of the current situation, there is a unique opportunity for insurers to rethink and innovate as they adjust and
respond. Firstly, there may be a need for new products. Some insurers have already had some fascinating early stage ideas about products that would be payable in the case of pandemics or epidemics. The concept would be that there is a small lump sum payout to help a customer meet any kind of increased or new expenditure for certain defined events. For example, pandemics could be included, with a payout being triggered once a certain number of cases have been registered in the customer’s state or region. In addition, products that are more similar to critical illness or riders on existing policies, which pay upon being diagnosed, could emerge as increasingly more popular around
the world. Economic crises caused by COVID-19 together with a low-interestrate environment will force the insurance sector to find some new products or solutions in life insurance, too. Secondly, there could be an increase in the appetite for usage-based insurance (UBI) products – where the
premium payable is based on the extent to which a certain activity is performed. The simplest example is for motor insurance where, through telematics and data analysis, a customer would be charged according to the actual number of miles they drive rather than paying fixed premiums over time. A counter argument to this is that, in the wake of COVID-19, consumer willingness to take public transport will drop, meaning that personal car travel becomes even more ingrained than before.

Insurance industry, at least its major part, is generally known as strongly typified and less  ersonalised. Is this now perhaps changing as a result of various different practices that insurers needed to implement and apply?

It is. I reckon that perhaps the most significant changes will be in the way that insurance products are sold, serviced and the usage of customer data. These changes will lead to much greater levels of personalisation and thus change the customer experience and value proposition.
Insurance has long struggled with the fact that it is not as personalised as other products. The offerings are relatively standardised and customers only buy their cover infrequently,
sometimes indirectly through an agent or broker. For many customers, it is a grudge purchase. They do
not particularly want to spend their money on insurance, but they know they should. There are signs that, due to the COVID-19 situation, this will begin to change. Insurers are recognising they need to bring more value to their customers, with more personalised offerings and communications on a more segmented basis. One of the notable features of the situation has been the great boom in online communication between people, including via video. It’s anticipated that some insurance products will
likely start to be sold through a ‘digital first’ advice approach – where customers engage with an advisor via a video call in the first instance, before the sale moves to other channels to complete. To conclude, the digital opportunity for insurers extends beyond the customer and broker interactions at the point of sale. COVID-19 has further highlighted the need for insurers to streamline, improve and digitalise operations and claims functions. Insurers are more than ever recognising the linkage between customer experience and the digital strategy, transformation approach and operational
improvement.

The Insurance Supervision Agency of Slovenia (AZN) is inviting you to the 6th Annual International Conference titled »HOW LOW WE CAN GO? Sustainable Insurance in an Uncertain World« on the June 14, 2021 in Ljubljana, Slovenia and online.

Adriatic Journal

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