Economy & Business
Insurance losses from Covid-19: Bad luck or bad governance?
Many insurance companies in Taiwan have suffered huge losses from Covid-related claims. How did this happen, what could companies have done to prevent such losses, and where does this leave us now?
By Lee Faulkner
Insurance companies are supposed to be stodgy, boring institutions. We want and need to be able to rely on them when things go wrong for us, and that boringness is an essential part of their appeal. However, as many of you will have seen from the news over recent weeks, some insurance companies in Taiwan have been battered by the claims resulting from insuring against Covid-19 either directly or as part of travel insurance policies. And for some the pain is set to get a lot worse.
Hindsight is unfair in circumstances like this, and it’s easy to snipe from the sidelines, but this should be an opportunity to look at what went wrong and learn from it. Going back to the fundamentals of insurance, how companies are governed, and the way ESG (Environmental, Social, Governance) principles should be implemented, would be a good start.
Underwriting philosophies and practices
The people within an insurance company who decide what risks to accept, and under what conditions, are the underwriters. The people who put a price on those risks are the actuaries. Underwriters make their professional judgements based on years of experience and piles of statistics. Sometimes, when a new risk like Covid-19 arrives, they have to dig even deeper into the unknown and extrapolate from previous risks that look similar to the new one. Cynically, one might call this “best estimate guessing” - without any intention to minimise the vital role of professional judgement here, that it exactly what it is - an educated and informed guess. Sometimes the guessing doesn’t work out, and insuring against Covid-19 is apparently one of those times.
But underwriters don’t operate alone - if the actuaries say there is plenty of margin in the rates i.e. enough “fat” to allow a profit even if things were to go bad, then the underwriter can be a bit more relaxed in the way they apply their rules and judgements. Scenario planners, such as economists and sociologists, also provide the framework within which underwriters operate. If everyone is forecasting that society will move this way instead of that, and that consumer behaviour will increasingly be influenced by that factor instead of this, then underwriters have every right, and perhaps even an obligation, to rely on those opinions.
Most importantly, however, underwriters are the agents of a company’s senior management team - they carry out the instructions handed down to them about the markets and products the management team want to enter or grow, the distribution methods they want to use, and the tweaks they want to add to their products to give them a Unique Selling Point. Their most aggressive instructions often boil down to the need to meet growth targets or achieve a specific market share or market ranking.
“Market share” and other irrelevant strategies
Growth for the sake of it is a meaningless, alpha-male strategy; growth doesn’t mean “profitability” nor does it mean “success”. Achieving a certain market share, or a place in the industry’s production rankings, in and of itself means nothing. You could double the amount of new business sold each year and achieve the number one position in the XYZ League Table of Insurance Companies, and then go bust because of your poor underwriting policies or lousy expense management.
Focusing on achieving a certain level of growth can help a company reach the critical mass necessary for it to cover its fixed expenses i.e. the expenses it must incur whether it writes one or one million policies, and that is perfectly legitimate aim. Marketing certain loss-leading products, within the ambit of what the regulators permit you to do, can help boost your sales of other profitable products; again, that would be a valid aim. But market share for the sake of it is just hubris.
Who might be to blame?
The results from some companies insuring Covid-related risks have been nothing short of horrendous. According to Financial Supervisory Commission (FSC) data reported in the press, the total cost of claims resulting from Covid coverage range from NT$40 billion to NT$100 billion, representing a massive multiple of the premiums collected for these policies.
Without knowing the inside details at each company, it would appear some people made a judgement call that Taiwan’s own excellent Covid experience in the initial phase of the pandemic would continue, and that judgement call was then copied by others. But why? Why did people and companies go along with the judgement calls made by others? Was it for fear of missing out on growth opportunities and market share? Were people with contrary views given a hearing or shouted down? How did the governance in each insurance company operate, and how are they structured to recognise such market “groupthink” and avoid it?
Were underwriters pressured into accepting risks they knew they couldn’t properly quantify or reasonably extrapolate from past experience? Underwriters, like other professionals, have a full range of views - are they given the space to exercise their judgement and communicate it, and are they listened to?
The “Social” part of ESG
ESG is the new big thing in the management and investor worlds. The ESG criteria are increasingly being used to measure and judge how companies are behaving towards their stakeholders. The concept of stakeholder includes the obvious - employees, customers, suppliers - but it also covers the communities and societies in which they operate.
In a capitalist economy, insurance fulfils a vital role - it would be impossible for a lot of trade to happen at all without it. But it also has an even more important social role - how would we cope without insurance companies helping us if we had a car accident, or our houses burned down, or we died before our time? Without insurance companies there are only two options - the state carries the burden, or we self-insure.
The head of the FSC has said that they are not inclined to use public funds to help out insurance companies; the Insurance Guaranty Fund exists to help out policyholders who suffer if an insurance company gets into difficulties, but the size of the fund for non-life insurance companies amounts to only NT$5 billion. So even if the government was willing to help, it doesn’t have enough money to make much of an impact. If there are no insurance policies in the market to cover the risks of Covid-19 because every company has pulled them from the market, and if the government won’t step in, then the average person consumer is left on their own.
For most personal and business trips, travel insurance is advisable; if you are travelling to a country where the cost of getting ill could bankrupt you, it is highly recommended; for some countries where coverage is required before you can even enter, then it is effectively compulsory. Leaving people on their own means they either now have to run the risk of having to pay for any Covid-related medical expenses themselves, or just not travel. How does the reaction of insurance companies to their huge losses square with their responsibilities to society under ESG?
Taiwan is out of kilter
Where does this leave any of us now? Looking to what happened overseas might provide some insight into the options available. Initially, and unlike in Taiwan, most insurance companies worldwide excluded Covid-19 from their travel insurance policies as they felt they were unable to underwrite them properly. As vaccination rates steadily increased, and as new Covid variants become less dangerous, most have now moved to including them, again the opposite of what’s happening here. Taiwan seems to be completely out of kilter with the rest of the world, so perhaps our insurance companies should have looked more closely at what its international peers were doing.
What worries me most is that as Taiwan’s quarantine rules are increasingly relaxed, and as more Taiwanese decide to travel overseas again, then many will be forced to self-insure with the inevitable serious consequences falling on an unlucky few. This is what insurance was supposed to help with, not leave you high and dry from.
We must go back to fundamentals and ask how we got into this position before we figure out how to get out of it. Were our underwriters too relaxed about looking at Covid in Taiwan in those early, halcyon days and assuming that the policy of “splendid isolation” would continue and work indefinitely? Or were they pressured by their management teams to continue to offer coverage for fear of missing out on market share? How have the needs of ordinary people been taken into account? Should insurance companies be allowed to leave people without the option of insurance, or should the state step in to help them? What does ESG in practice really mean in situations like this, or is it the corporate box-ticking exercise that many suspect it to be?
These are difficult questions to answer, largely because we’re all looking for a scapegoat, but almost certainly there are many goats in this herd. Yes, underwriters may have been to blame, but they wouldn’t and couldn’t have acted alone, so perhaps an honest show of hands to accept some responsibility would be a good start.
Lee Faulkner is a Fellow of the Institute and Faculty of Actuaries, the UK’s actuarial body, and has more than 30 years’ experience in the world of financial services in Asia, Europe and Latin America. He is a Taiwan Gold Card holder and now lives in Taipei.