Since a nationwide lockdown was imposed in the UAE in late March to curb the spread of COVID-19, the impact of the pandemic on insurance business is expected to first be realised in the second quarter of this year, says Badri Management Consultancy, an actuarial consulting firm in the Middle East.
The resulting liquidity issues in the economy may cause insurance receivables to spike up, increasing the credit risk of insurance companies, the consultancy says in a new report titled “Performance Analysis of UAE insurance companies (including foreign branches) for the year 2019”.
The first coronavirus case was reported in the UAE on 29 January 2020, and the first two deaths reported due to COVID-19 on 21 March 2020. The UAE government took action and imposed a state-wise curfew. The reported cases within the UAE as at 1 June 2020 stood at 35,192.
Impact on the insurance industry
Generally, the impact of the pandemic on the insurance industry has taken many forms, including reduced business activities leading to a drop in the topline, fluctuations in interest rates, low investment returns or investment losses, delayed reporting and settlement of claims, and changes in the claims frequency, with the severity of the impact dependent on the class of business.
COVID-19 has also compelled insurance underwriters to go through the terms and conditions of covers provided for pandemic clauses. There may be other areas of potential impact that are still uncertain which will be realised over time, says the Badri report.
In the UAE insurance sector, the main focus areas have been Medical and Motor business accounting for 51% and 17% respectively of the total insurance premiums of national insurers as per the 2018 annual report of the Insurance Authority. The loss ratio in the Motor class is expected to move favourably due to restrictions on movements; however, refunds or reductions in insurance premiums might offset the favourable impact.
While the current loss ratio for the Medical line may show improvements as COVID-19 related costs are borne by the government, the experience going forward is uncertain considering the postponement of non-COVID medical treatment, a situation which might lead to critical conditions in later periods.
The Badri report added, “In addition, the Insurance Industry is adversely exposed to claims from event cancellation, business interruption or travel risk as a result of pandemic, which may pull down the bottom-line for the industry from insurance activities.”
Meanwhile, the life insurance sector is exposed to the increased mortality resulting from the pandemic. The COVID-19 mortality rate so far in the UAE is approximately 0.8%. Therefore, the situation necessitates conducting portfolio reviews, particularly as regards exposure to policyholders who fall in the critical ages.
In addition, the insurance sector has incurred costs to digitalise operations and systems for continuity of the business and to maintain the customer satisfaction. In contrast, there have been salary cuts and staff redundancies within the industry to cope with the declining economic conditions. Insurance companies are struggling to contain expenses in line with the potential reduction in the topline. As a result, the rising trend in the expense ratio over the past few years, excluding 2019, is likely to continue, says Badri.
Nevertheless, the pandemic has brought into light new products that the insurance industry can target and has put pressure on insurers to enhance the operations and refine their underwriting terms.