Impact of COVID-19 on General Insurance sector in India and the way forward

1. Introduction:

On December 8, 2019 the first pneumonia case of unknown cause was found in Wuhan, China. It was later identified to be caused by a new coronavirus and the disease was named as Coronavirus Disease 2019 (COVID-19) by the World Health Organisation (WHO). COVID-19 has posed a significant challenge to both the lives and livelihood of the people around the world. Economic activities of India are also affected by this unprecedented crisis with phasewise lockdowns, implementation of social distancing measures and supply chain disruptions. Further, disruptions in global economy have imposed additional woes to the Indian economy.

Globally the countries have focused on two strategies, one on mitigating but not necessarily terminating the spread of virus while the other depends on more stringent measures to contain and reverse the growth trajectory of virus (Qiu et al., 2020). While most western countries started with an implementation of the former strategy, later most of the countries have shifted towards more stringent suppressing strategy which, interalia, involves city lockdown, mandatory quarantine and other social distancing measures to restrict the spread of COVID-19. Countries such as China, Singapore and South Korea have adopted the latter strategy from the beginning. India had also imposed strict measures in the form of lockdown from 25^th March 2020 till 31^st May 2020 (MoHA, GoI) and imposed social distancing guidelines to restrict the spread of virus. These measures had assisted in controlling the infection rates, however, it took a toll on the economy paving the way to restart the economic activities by way of phase wise unlockdown w.e.f 1^st June 2020 (MoHA, GoI). This led to gradual ramp up of economic activities which is also reflected in future expectation index of Consumer Confidence Survey for July 2020 (RBI).

One of the industries majorly affected by this unprecedented situation is the General Insurance (GI) sector or non-life insurance sector including Health Insurance. General insurance compensates the insured peril linked to property or assets and against any claims that may arise due to lawsuits or hospitalisation. Year wise general insurance premium figures from 2000-01 indicating an upward movement over the years is provided in Figure 1 to understand the pre-Covid GI scenario in India. Further, non-life insurance density has increased from 2.4 USD in 2001 to 19 USD in 2018 (growth of 692%) & non-life insurance penetration has increased from 0.56% in 2001 to 0.97% in 2018 indicating growing share of non-life insurance markets in India (IRDA, FY 2018-19 annual report).

It is evident that post-liberalization of Insurance sector which has commenced from the year 2000-01, general insurance premiums have increased from Rs 10087.03 crores in 2000-01 to Rs 189301.75 crores in 2019-20 indicating a growth of 1776.68% with an exceptional growth in the last 5 years. However, the Covid-19 situation posed a challenge to the sector with rising infections and reduced business activities. Insurance regulator Insurance Regulatory and Development Authority of India (IRDA), Government of India (GoI) and statutory body of general insurance segment (General Insurance Council) have taken slew of measures to overcome the adverse impact on the GI sector.

2. Objectives of the study:

Some studies have been conducted to assess the impact of COVID-19 on Indian economy (Dev and Sengupta, April 2020; Das and Patnaik, May 2020), however, study on Indian general insurance sector are less extensive. This study is a modest attempt to assess the impact of COVID-19 on general insurance sector in India, the present situation the sector is exposed to, steps taken to mitigate the burden on the industry & policyholders and the way forward.

3. Impact of COVID-19 on General Insurance sector:

With more than 63 lakhs cases at the end of September 2020 (Ministry of Health and Family Welfare, GoI), hospitals are getting overloaded leading a toll on health insurance sector with increase in hospitalisation claims. Also business entities got affected due to lockdown and other social distancing measures. Due to lockdown the insurance premium collection figures of certain segments have seen a decline thereby affecting the general insurance sector as a whole.

Decline of 8.60% in general insurance premium is noticed in March 2020 mostly due to imposition of lockdown with less premium collection and reduced number of new policies. Personal accident was the worst hit segment (decline by 53.03%) and with reduced economic activities, credit offtake diminished leading to contraction in Credit guarantee premiums (by 41.99%). Further, motor, health and other miscellaneous segment also experienced a significant decline in March 2020 (IRDA).

Lockdown continued from April to May 2020 with subsequent phase-wise lifting of lockdown commencing from June 2020 and gradual opening up of economic activities. Table 1 highlighting general insurance gross premium for the months of March-May 2020 may be studied to understand the implications of lockdown on GI.

Table 1: Gross premium underwritten by general insurers for the months of March-May 2020

(Rs. crores)

Table 1 Contd…

(Source: IRDA)

A sudden decline of gross premium in the month of March 2020 is thus mostly due to imposition of lockdown leading to closure of offices with less premium collection and reduced number of new policies which also continued in April and May 2020. Non-payment of renewal premiums in April-May 2020 period had a major impact on general insurance premiums. Reduced cargo vessels movement along with imposition of Covid restrictions in certain countries, timeline extension for depositing premiums during lockdown period are some of the factors leading to decline of premiums.

Reduced labour supply and supply chain disruptions are expected to have an adverse impact on the business continuity plans. Increased healthcare spending is another consequence of this COVID-19 pandemic. Other impacts that are envisaged on GI sector are:

• Motor insurance premiums consists about 37% of the total GI premiums in India, however, motor claims are expected to decline, given fewer vehicles on the road amid lockdowns with reduced economic activities and lesser plying of vehicles, leading to much lower frequency of accidents (Sigma 4/2020).
• Business-continuity insurance claims and commercial-risk claims due to the economic slowdown are expected to go up in India though effects may vary from small and medium sized business with larger business enterprises.
• A spike in health insurance claims will likely follow, if the increasing trend of COVID-19 infection continues.
• With reduced movement and restrictions on large gatherings, travel insurance and some event cancellation covers may be triggered though pandemics are often excluded in such coverage.

The ongoing COVID-19 crisis is not only affecting the demand side but is also reducing supply of insurance because insurers are also seeing and expect more COVID-19 related claims and are recording large mark to market losses from equities and alternative assets reducing the risk appetite of insurers. Further, investment returns will remain under pressure with lower interest rates which is expected to be there for a longer period.

To mitigate the above impacts, government and regulators are taking efforts to improve the sector and overcome the challenges posed by the ongoing crisis.

4. Steps taken to mitigate the impact:

Apart from revival of economic activities by way of phase wise unlockdown commencing from 1^st June 2020, the steps taken by the Government and regulator have helped to improve the general insurance sector and enhance the confidence of the policyholders, gist of which is provided below:

• Motor third party insurance policies that fell due for renewal during the lockdown period commencing from 25^th March 2020 to 3^rd May 2020 and could not be paid in view of COVID-19 were allowed timeline till 15^th May 2020 to ensure continuity of the statutory motor vehicle third party insurance cover from the date on which the policy fell due for renewal such that any claim during this grace period can be paid. (Source: IRDA Order, 16.04.2020)
• Policyholders of Health insurance policies whose renewal fell due in the period from 25^th March 2020 upto 3^rd May 2020 were allowed to make renewal payment on or before 15^th May 2020 to ensure continuity of the health insurance cover from the date on which the policy fell due for renewal so that any valid claim triggered during the grace period can be paid. (Source: IRDA Order, 16.04.2020)
• Insurers were advised to ensure claims related to COVID-19 be expeditiously settled
• Guidelines on Standard Health Insurance Policy called Arogya Sanjeevani Policy was issued by IRDA and clearance to 29 Health and General Insurance companies were provided to market the above Health Insurance product which also includes COVID-19.
• Mandatory health insurance coverage to workers to be provided as part of the National Directives of Government of India dated 15.04.2020.
• IRDA allowed all the insurers to collect health insurance premiums in instalments as deemed appropriate for any specific product(s) for ease of payment (IRDA directive dated 21.04.2020). The instalment facility in premium may be offered either as a temporary relief for 12 months or as a permanent feature in respect of all the health insurance policies that are due for renewal upto 31^st March 2021, thereby relaxing the extant guidelines that mandate a gap of at least 12 months for minor modifications.
• IRDA on 10.07.2020 has designed a standard Covid specific product addressing basic health insurance needs with common policy wordings and mandated general and health insurers to offer this policy called ‘Corona Kavach’.
• To tackle the COVID-19 situation and to build a ‘self-reliant’ India, Government of India in May 2020 announced a special economic package as ‘Atmanirbhar package’ amounting Rs 20,97,053 crores to give relief to the Indian economy. No specific announcements were made for the general insurance sector, however, it is widely accepted that general insurance sector is linked to the economic activities apart from health insurance. As this package is to give an impetus to the economic activities already affected by COVID-19, it is expected that economic recovery will lead to upliftment of general insurance sector.

The steps initiated and taken by the regulator/ government/ statutory body primarily consist during the period of lockdown when the economic activities came to halt with numerous restrictions imposed on movement. However, in the period of phase wise unlockdown which commenced from 1^st June 2020 resumption of business activities has taken place. The effect on GI sector can be precisely inferred by the premium figures over the period from June to August 2020 (Table 2).

Table 2: Gross premium underwritten by general insurers for the months of June-August 2020

(Rs. crores)

Table 2 Contd…

(Source: IRDA)

Non-payment of renewal premiums in April-May 2020 period had a major impact on general insurance premiums. The situation improved in June 2020 except for marine, aviation and miscellaneous segments. In the subsequent months of July and August 2020 increase in insurance premium in aviation sector is observed due to resumption of airline services. However, motor and personal accident segments in July and August 2020 have seen a decline from the level of June 2020 due to lesser vehicles on road and the base effect due to deferment/ time extension in premium collection allowed by government and regulators in the month of April 2020 which were subsequently received in May (partially) and June 2020. Also people still prefer work from home wherever possible and reduced leisure travelling. Improvement in marine segment is still not visible due to restriction of cargo vessels movement and global economic downturn added by Covid restrictions imposed in certain countries.

5. Way forward:

The challenges lie in overcoming this situation and protect the interest of all stakeholders of the general insurance sector in the days to come. Some of the probable solutions to improve the sector and to conquer the ongoing crisis are furnished below:

• Infrastructure investment to drive General Insurance sector growth:

Against the weak economic activities, investment in infrastructure increases the resilience and can improve productivity since it has a positive multiplier effects on output. COVID-19 pandemic has also demonstrated the urgent need for more investment in health infrastructure in emerging markets and more investment in this area is expected. Apart from large gaps in health infrastructure exposed by the present COVID-19 pandemic, main drivers of infrastructure investment in the coming years shall also include ongoing urbanization, digitalization of smart cities and infrastructure. In particular, India will add 405 million to global urban population between 2019 and 2050 (Sigma 3/2020) and is at present the second largest emerging market in terms of infrastructure investment. Between 2007 and 2018, India had the highest growth of 7% (CAGR) in investment in infrastructure. Hence, if this spree continues it may lead to more investment in infrastructure which in turn will lead to increase in demand of related insurance to cover risks associated with such projects, both during construction and operational phases. Further, infrastructure investments will feed back economic activities leading to higher disposable income enabling the people to buy property/ assets which include home, vehicles, etc. which in turn generate the need to cover the risk of loss or damage associated with such assets.

• Rising risk awareness and technology orientation:

Rising risk awareness, accelerated digital transformation & new and parallel supply chains are the shifts that are expected to occur due to the ongoing Covid-19 crisis. COVID-19 will encourage increased investment in information and communication infrastructure. By 2030, India is expected to be among the top 10 largest insurance markets of the world. The global market share of India is expected to increase from 1.7% in 2019 to 2.3% in 2030 with premium volume increasing from 106 billion USD (2019) to 234 billion USD (2030) (Sigma 4/2020).

• Strong underlying fundamentals and rate hardening of GI sector:

Indian GI sector has already seen an upward movement post-liberalization of the insurance sector (Figure 1). Inspite of the setback due to Covid which is equally being faced by the global GI market, the global GI premiums are expected to grow by 1.6% on average in 2020 and 2021. Though there would be a contraction of 0.1% in 2020 the GI market is expected to rebound strongly to 3.3% in 2021. This trend is also expected to continue for India considering the history of GI sector growth and in line with global markets. Rate hardening has helped in improvement of the sector which is also expected to continue in the future.

• Insurance solutions for pandemic risk:

Insurance solutions for pandemic risk could gain traction to cover risks after COVID-19.

The study will help policymakers and insurers to take a holistic view of the impact of COVID-19 situation and plan for the future accordingly.