Indian insurance industry has not been able to insulate itself from the growth pressures faced by Indian economy in general. During the pandemic, the risk management practices that were adopted by the companies have been put to acid test currently.
COVID 19 global pandemic was a double blow for the Indian economy which was already struggling. According to the World Bank, the current pandemic has “magnified pre-existing risks to India’s economic outlook”.
What began as a health crisis, quickly unfolded into a business crisis. There is hardly any business sector that has been left untouched by the novel coronavirus COVID-19. outbreak. Aviation, Tourism, Manufacturing, Transportation, the banking, financial service and insurance (BFSI) and Retail industries top the list.
In March, India imposed a nationwide lockdown with the hope to contain the outbreak. The Indian lockdown which lasted for nearly three months, was supposedly the most stringent lockdowns the world has seen.
To steer the country through these unprecedented times, the Indian central bank – Reserve Bank of India and the Indian government have implemented several measures – fiscal, legislative, and operational. The Government of India began a series of initiatives – all non-essential services in the country were halted (insurance was classified as essential), an aid package of more than USD 260 billion was dispensed to create a self-reliant India and several labour law initiatives were undertaken. The healthcare space also witnessed a drastic shift with the opening-up of the telemedicine sector in India and remote treatments being made accessible.
In April 2020, India also changed in foreign investment policy to curb “‘opportunistic takeovers/acquisitions’ of Indian companies due to the current pandemic”. The revised policy ensures that all foreign investments from countries that share a land border with India will now be under scrutiny of the Indian Ministry of Commerce and Industry.
Challenges faced by the insurance industry
The COVID-19 crisis raised short term and long tail challenges equally for the insurance industry. Insurance companies were facing operational and procedural challenges, revenue dips and depleting reserves as well as the mandate to meet the growing coverage requirements faced by the entire country.
Insurance players had to attend to concerns such as:
- Business continuity: Risks on an insurance companies own existence was required to be planned for and several stress-test mechanisms were kickstarted.
- Employee well-being: While the insurance industry is moving towards digitisation, it is and will always be employee centric. With the government classifying insurance as an essential service, employers were required to strike a balance between work-from home procedures and the requirement of face-to-face interactions with customers. This also presented an increased exposure to the virus.
- Crisis management: Insurance companies are expected and required to monitor the evolving situation of the pandemic and initiate all measures necessary to effectively communicate and manage employees and customers. Moreover, an insurance company is required to maintain effective and frequent communication with regulator, customers, partners, agents, brokers, shareholders, etc. to build confidence and ensure continuity of service.
- Capital adequacy: Indian insurance companies are required to maintain a prescribed regulatory solvency and ensure financial resilience. While unprecedented exposures are accounted for to an extent, the pandemic had the potential of sending balance sheets into a tailspin.
- IT infrastructure and cyber security: With the gear increasing on remote access requirements, a tall order of building an appropriate IT infrastructure was asked for in a very short span of time. There was a heightened risk of cyber incidents and insurance companies were inevitably vulnerable and easy targets.
Regulatory challenges and initiatives
The Indian insurance regulator – Insurance Regulatory & Development Authority of India (IRDAI) has continually released several instructions and clarifications that steered the course of insurance responses to the pandemic.
- Insurers were instructed to accept COVID-19 related claims under active health insurance policies even though underwriting and actuarial procedures did not account for such increased exposures.
- IRDAI advised insurance companies to extend the grace or delay period by 30 days in case of policy lapse or renewal.
- Specialised short term COVID health insurance products were launched with fixed benefits
- A standardised product COVID product was also launched to provide protection to a large number of employees engaged in manufacturing, services, SME, MSME, logistics sector and migrant workers, catering to their medical needs.
- Several regulatory compliances were relaxed or timelines were extended by IRDAI
COVID Impact on health insurance
The pandemic has driven the realisation of needing protective investments – specially health and life. There has been a promising uptake of 30-40% in health insurance adoption. The tipping scale has moved from health insurance being a ‘push’ product to a ‘pull’ product.
In the wake of the COVID crisis the health insurance industry has seen tectonic shifts and has become the collective priority of businesses, the government, and people. The demand for health insurance has increased but underwriting thresholds have also seen a rise. India has been an under-insured country even though the mass insurance scheme – Ayushman Bharat launched for the poor, seemed to have bridged the gap significantly.
While in the short term, insurers have responded to the call for adequate coverage, concerns are rising on the long term and indirect effects of the pandemic. Experts have analysed that COVID-19 interacts adversely with co-morbidities such as diabetes, renal and other chronic diseases and any impact may prolong conditions resulting in a longer trail of non-COVID-19 claims also.
Further, typical insurance policies and specifically the Ayushman Bharat scheme does not cover the impact of setting up isolation wards which would increase underwriting assumptions and cost calculations significantly.
On the other hand, newer products are developing and insurers may switch to developing specific products rather than standard wordings, while retaining the need for simplified policies.
COVID Impact on different lines of business
- Life insurance: The crisis is expected to result in customers rushing to increase covers. The market would see a reactive boost in demand in term insurance. Investment-linked products may not see major demand due to a volatile stock market.
- Motor insurance: The automobile space would see a lack of purchase of new vehicles and fewer vehicles in transit thereby reducing the chances of accidents resulting in a decline in new policies and reduced claims on existing policies. However, a dichotomy exists as social distancing is expected to persist for a long period of time causing a surge in private vehicles – two-wheeler and low cost four wheelers, thereby increasing the need for insurance. A shift anchored by COVID-19 can be seen in new usage-based motor insurance policies that were launched recently which allows owners to insure vehicles for the kilometres they intend to drive.
- Property insurance: Large impact on property insurance is seen with the trigger of the 30 day no-occupancy exclusions of property damage insurance policies. This clause is likely to bring in a large chunk of disputes.
- Professional Indemnity: While work is being carried out at home, there seems to be an increase in potential vulnerabilities that organisations face. The management is making decisions in the teeth of daily changing government policy. Actual or alleged breach of duty, negligent act, error, omission, misstatement, misleading statement, breach of warranty or breach of confidentiality, all are actions and/ or inactions that may trigger a claim against an organisation.
- Business interruption insurance: BI losses has been a major area of discussion during this time of the pandemic. In Indian policies, property damage triggers business interruption losses and advanced loss of profits, hence triggering disputes and debates over BI losses caused even without physical damage to property. In India, the market is not tested as the judicial functions were largely suspended.
- Directors and Officers liability insurance: In the wake of crisis, the Directors and officers may face a litigation from the employees as employees may contract COVID 19 while travelling to work or while working in the office premises. Further, there may be an increase in security class action suits where typically allegations would include, (a) failure to disclose or adequately disclose risks that company faced – or failure of the company to update prior disclosures as circumstances evolved; (b) inadequate steps to mitigate risks; (c) failure to observe recommended or required protocols; or (d) failure to develop adequate contingency plans. Also, though many existing D&O policies may not be written with cyber and technology related risks in mind, the failure to protect against and insure for privacy or cyber liabilities could potentially lead to D&O liability.
- Cyber insurance: A major boost is seen and is further expected in cyber insurance due to a reliance on remote access and increasing risks and vulnerabilities.
The insurance industry has witnessed a massive shift towards digitalisation. The global financial crisis in 2008 propelled the redesigning of payment systems and processes and now COVID-19 has forced the insurance industry to adopt remote and digital ways of working and it is undoubtedly set to drive a wider acceleration of technology adoption across the industry. This is a trend, of course, that has already been with us for some years: but the current situation will significantly expedite it
Insurers have undergone digital transformation at the product level or specific elements in the supply chain but now will be urged to reprioritise technology spend into insurtech, digital distribution and technological infrastructure.
What we at Khaitan Legal Associates think?
Government and IRDAI did some quick thinking and responded to COVID 19. Even the insurance industry rose to the challenge and aligned itself with the larger objective of the Government and IRDAI in alleviating the impact of the pandemic and its fallout on the policyholders. Unlike several other jurisdictions, where the insurance/financials services regulator became eager to intervene in existing insurance covers, especially in the area of business interruption, the IRDAI thankfully exercised restraint in India. However, now when the worst seems to be behind us, the Government and IRDAI should get back to rebuilding the insurance story. The India growth story will be incomplete without a robust insurance sector, so the focus should be back on reinvigorating the insurance sector. Some work has commenced but a lot more needs to be done.
Circular Ref. No.IRDAI/HLT/REG/CIR/054/03/2020 IRDAI press release dated 23-03-2020