A Challenge: Covid-19 And Its Impact on The Insurance and Banking Sectors

by | Dec 10, 2020 | Finance and Insurance | 0 comments

What we once considered normal is over. The ongoing coronavirus crisis has created instability, volatility, and uncertainty throughout the world. Its impact on the global economy has been immense – and its knock-on effects will take time to discover.

“We’re recovering, but to a different economy.” – Jerome Powell, US Federal Reserve Chairman.

This is obvious when we compare 2020 with 2019.

For the United States, 2019 was positive with low unemployment and inflation falling under the Fed’s target of 2.0%. Today, in the second quarter, growth has fallen by a massive 31%. Unemployment is at 14.7% with fifty million people out of work.

This has, unsurprisingly, led to a significant drop in consumer spending (a foundation of the US economy). And without a new stimulus package expected before President-elect Biden assumes office, this is unlikely to change before the end of January 2021. Such stimulus would, according to Wall Street, be a definite boon to the economy.

Regardless of how things turn out in the next months, the US economy is likely to take three years to recover.

Within the European Union, things aren’t much better. The eurozone economy has fallen by minus 7.8% during 2020 (though better than the -8.7% from earlier predictions) and is only expected to expand by 4.2% in 2021. The worst-hit has been Spain, Italy, and France, whereas Germany’s GDP, overall, has fared best with a fall of 5.6%. Austria and Switzerland have also performed well, though with a clear drop from 2019.

The United Kingdom’s long-term pre-Brexit outlook is unclear:

“Although we expect a boost to economic activity as vaccines progress and confidence builds in the first half of 2021, the longer-term outlook will very much depend on the nature and duration of further restriction measures and the outcomes of the UK-EU trade negotiation, which could weigh on growth.”
– Jonathan Gillham, Chief Economist, PriceWaterhouseCoopers.

At the end of 2020, however, eurozone debt looks likely to exceed 100% of GDP. This has the potential to further impact economic growth and, potentially, to result in financial concerns – particularly with bankruptcies and job losses – domestically and internationally.

On the bright side, as restrictions lift and businesses reopen, it’s clear that the economy has shown improvement.
But as with the United States, full recovery will take years, not months.

EU economic output “will not return to pre-pandemic levels by 2022.”
– Valdis Dombrovskis, European Commission Vice President.

This means that the challenges facing businesses of all shapes and sizes are set to continue well beyond 2021. There won’t be a quick and easy fix.

The influence of COVID-19 on the banking sector

With today’s instability and high volatility in global capital markets, all industry is in a state of flux. There is an adverse impact on valuations and business confidence. Banks in the US are looking at flat interest rates and the repercussions of a volatile election.

Things aren’t different for EU banks. With asset quality low, so are profits. And while capital and liquidity buffers are still strong, potential credit risk losses are a possibility. As per the KPMG Global banking M&A outlook H2 2020 report, ‘A few European banks have already posted significant losses … to face a potential surge in bad loans.’.

There is also the potential for a global recession. A recent PwC COVID-19 US CFO Pulse Survey showed 70% of respondents saw a potential global recession as one of their top three concerns with respect to COVID-19. Seventy-five percent were concerned with the ‘Financial impact, including effects on results of operations, future periods and liquidity and capital resources.’.

On a more ‘micro’ level, your operational issues must be considered in relation to COVID-19.
For example:

  • Loan impairments will require a closer look as principal and interest payments come under increasing threat of not being collected. There’s little doubt that COVID-19 is seeing an increase in non-performing loans – as always happens during a crisis.
  • Risk management. Nobody could have predicted the speed and scale of the COVID-19 crisis and any risk management frameworks that were put in place post-2008 haven’t been adequate to tackle this novel global threat. Areas to evaluate and audit include:
    • Operational resilience – to ensure you can keep supplying essential services.
    • Comprehensive stress testing – to decide if you’re ready for any scenario and able to fully quantify each risk’s impact, and
    • Cost and efficiency optimization – so that you’re agile enough to manage any risk – this may include adopting technologies such as Robotic Process Automation and Machine Learning.
  • Customer service. While many will see this as a short-term impact, it’s essential to keep in mind today’s rapidly changing customer preferences and how the coronavirus crisis is accelerating the trend toward using financial apps and online banking. You need to ensure you’re ready for this shift.

FINTECH SURGES – AS LOCKDOWNS ADVANCE THE NEED FOR DIGITAL TRANSFORMATION.

In this time of isolated lockdowns and social distancing, the use of online communication tools and financial technology apps has skyrocketed. 

Ever since the 2008-’09 financial crash, fintech has been bridging the gap between quickly changing customer expectations – in how they manage their money – and traditional financial services. Today it’s all about personalized, immediate, 24/7 access at a low cost. For fintech, the coronavirus crisis is a disruptive influence that is drving substantial growth. 

As we move into 2021, we’ll have been 10 months into this pandemic.
It’s been a time for hard lessons and radical changes for everyone. But there’s no doubt that you’ll emerge from this in a stronger place and armed with a better knowledge of your customers, and an improved ability to scale your operations and adapt your capabilities (particularly digital). Importantly, you’ll have a greater understanding of how such radical events can affect the industry as a whole – while being able to react quickly and operate with agility.

How Corona is affecting the insurance industry

Regardless of the field of insurance you’re involved in, whether general, life & pensions, health, or reinsurance, there’s no doubt that many of your customers are in an uncertain, and for some a desperate, position. You may also be facing your own business continuity and employee issues. How well have your employees managed working offsite and has it affected your business? Are your digital offerings coping? Are you able to supply the essential services your clients demand?

“Technologies including machine learning, artificial intelligence, telematics, and automation already presented challenges to the status quo across the insurance value chain. The COVID-19 pandemic has greatly accelerated that trend.”
– Julie Goran, et al. McKinsey & Company.

Overall, when it comes to customers, insurers in the US and the EU are experiencing similar issues.
Lockdowns have curtailed client’s ability to meet face-to-face with your employees, which means being redirected to online/digital services.

  • Concerns over job security and business activity have seen a fall in insurance renewals (including a reduction in existing coverage) and the purchase of new policies.
  • Certain areas are seeing a significant increase in claims (specifically health, travel, transport, and hospitality).
  • As the global economic slowdown continues, liquidity and solvency issues are becoming more urgent, and
  • For many insurers, business continuity plans were not ready for the disruption caused by COVID-19.

 

A CALL FOR DIGITIZATION.

Lockdowns have shown that an effective and secure online presence is essential. but are your claims management staff ready and able to work remotely – and is your online system ‘up to scratch’? 

 

“There is a risk of losing custimers to more digitally-enabled competitors moving forward, partiicularly in personal lines ehere many custimers’ patience with non-digitized processes these days is low. .”

– Laura J Hay, Global Head of Insurance, KPMG INTERNATIONAL

Comprehensive testing can help.

 

The light at the end of the tunnel

As of this writing, there are two strong candidates for COVID-19 vaccines. But they won’t appear tomorrow, and they won’t deliver an immediate global cure. But it will come.
As with all industries, the banking and insurance sectors must consider how they’ll tackle the next months – if not the next couple of years. This will involve close consideration of how customers are reassured and how their concerns are handled. And most importantly, how you earn their trust during this challenging time.

Entering the ‘new normal’ doesn’t mean it’s ‘business as usual’.

 

“In the midst of every crisis. lies great opportunity.”
– Albert Einstein

 

As with any business crisis – and more so during this ingoing-pandemic – how you respond to your employees, your business partners, and your customers is essential. Getting it right can make a huge difference to your public perception and to your bottom line. 

 

For a deeper insight, read the Deloitte article ‘Responding to the coronavirus crisis’.

While the pandemic won’t be here forever, it will fundamentally change how we do business.

Digitalization will expand quickly as it phases out more traditional ways of doing the same thing – particularly regarding customer interactions. The crisis will also impact how we assess risk, how we plan for future disruptions, how we develop business models that are able to better handle such changes – and how we test them to ensure they’re not only ready but able to effectively deal with such disruption.

The true challenge, however, will be ensuring these solutions are fully optimized to meet the unique challenges. To find out how to truly strengthen your online business and ensure it’s ready for any challenge, visit us at: Testbirds.com.

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About the author

Carl Fryer

Carl Fryer

Sales Manager

Carl is our expert for the finance, banking, and insurance industry. 

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Testbirds specialises in the testing of software such as apps, websites and Internet of Things applications by using innovative technologies and solutions. Under the slogan, “Testing Reality”, the company offers various testing methods to its clients looking to optimise the user-friendliness and functionality of their digital products. With over 250,000 registered testers located in 193 countries, Testbirds is one of the world’s leading crowdtesting providers. In addition, the IT service provider utilises cloud based technologies to support customers in the optimisation of their digital products. The combination of the two testing methods delivers a unique and extensive portfolio that takes the quality of software to the next level. Testbirds was founded in 2011 by Philipp Benkler, Georg Hansbauer and Markus Steinhauser. Today, the company has over 100 employees. Other than its headquarters in Munich, there are now offices in Amsterdam, London and Stockholm, franchises in Hungary and Russia and sales partners in Italy.

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