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Covid19 impact on the Insurance market (Part 2)

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Coronavirus has wide consequences for the entire global automotive industry from the manufacturer to the driver, as well as for all segments of the global market connected with this, including the car insurance market.

Due to the fact that the number of trips has sharply decreased, the number of claims for motor insurance policies has also decreased. So, according to Arity, from March 8 to the time of writing the article, the total number of miles that American car drivers drove drove more than halved compared to the previous period.

In order to retain customers in the long run, and in some cases, for the purposes of meeting new regulatory requirements, a number of insurance companies have decided to return to the customers part or all of the paid insurance payments. In the United States, insurance companies made a total decision to return more than $ 10.5 billion to customers. Among these companies are Allstate, Geico, Liberty Mutual, USAA, Chubb and others, insurance industry giants.

Another reason for such a review by a number of insurance companies of their approach to interacting with customers is that insurers often base their premiums on mileage estimates. It is likely that insurers in other countries will follow the same steps as companies in the United States. In the UK, the Association of British Insurers has promised support for pandemic-affected insurers, while the Spanish MAPFRE intends to return insurance premiums to policyholders of SMEs.

In general, according to experts, in the long term, this step will contribute to changing the image of the industry, increasing transparency and justice. Transparency in pricing and insurance terms was what usually caused the most questions from users. While Insurtech startups have succeeded in improving the quality of customer service, the transition to returning premiums to customers that no longer meet their needs will naturally be seen by policyholders as moving in the right (customer-oriented) direction. In this regard, coronavirus provides insurers with a good opportunity to increase customer confidence.

Pandemic and Global Recession: Investment in the Insurance Market

Due to the global downturn in economic activity, the ongoing pandemic, trade tensions between major economic agents and falling consumer demand, some of the leading economists predict that the global economy may not only fall into recession, but also recall the long-forgotten word “depression” over the next 4-8 quarters.

This will inevitably lead to a reduction in most cyclical sectors of the economy and to a narrowing of liquidity flows to dependent segments (for example, insurance). The end of the loan cycle is superimposed on the reduction of the underwriting cycle, which will further spur negative trends in the insurance market. The standard algorithm of the economic cycle in the insurance market is constructed as follows:

  • The underwriting cycle begins with the fact that regulators narrow the standards of insurance underwriting, while insurers widely increase the volume of attraction of insurance funds in the form of premiums;

  • New underwriting standards and increased premiums, respectively, lead to increased profits and increased levels of capital consolidation in the insurance sector;

  • The increased volume of underwriting premiums increases the competition of insurers, which as a result reduces insurance premium rates and simplifies underwriting standards, entails losses for insurance companies and creates conditions for the resumption of the cycle.

At the stages of the cyclical economic downturn, insurers are looking for new sources of income, as well as new ways to minimize their overall operating expenses, narrowing their losses. And it is at this point that Insurtech comes into play. As we already understood, in the medium term in the main insurance segments three of the following will be most demanded: car insurance, travel insurance, insurance in the e-commerce segment. So, let's find out the basic rules and principles that work in this market as part of economic cycles, and give an idea of which segments of the Insurtech market can demonstrate high potential for long-term investment for international investors:

  • Before the pandemic, we expected that the car insurance market in the next 5 years will show an average annual growth rate of 7-10%, at the moment our medium-term forecasts have been revised to 3-4%. Before the negative effect of the pandemic, we assumed that investment in car insurance could amount to about 410 million US dollars. At the moment, we assume that this volume may be reduced to $ 250-300 million;

  • The market of insurance of transactions in the E-commerce market will continue its accelerated growth. We revised our initial forecasts for the growth rate of this segment in the forecast period;

  • The market of insurance of transactions in the E-commerce market will continue its accelerated growth. We revised our initial forecasts for the growth rate of this segment in the forecast period up to 5 years from 11.1% to 15-17%. It was originally expected that this segment of the global insurance market could reach $ 170 million by 2023 (estimated based on the total approximate amount of investment). At the moment, we assume that this segment of the global insurance market may reach $ 230 million by 2023 (in terms of attracted investments);

Travel insurance is the third market segment, showing an increase in investment demand. We expect that the travel insurance market (not least due to the proposal from Insurtech projects) in the next 5 years will show an average annual growth rate of 12-15%. Investments in this segment may amount to about $ 91 million.

Summing up, we can say that as the financial and currency cycles come to an end, the fintech technology market (and, in particular, the Insurtech segment) will face conceptual changes in the long-term demand structure, as well as (in some cases) restructuring the structure of the liquidity channel. We repeat: we expect the market to reach its short-term highs in 2023, but in the medium term, we expect that the market growth rate will not only recover, but also remain in the long term (at an approximately high level) at 30-35% y / y.

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