COVID-19, the Economy, the P&C Industry, and Technology Spending
20 March 2020
I am a technology analyst covering the P&C industry in North America. I am not an economist, and I am certainly not an epidemiologist. So why would I be writing a short essay with this title? Because, it is clear that public and private COVID-19 counter-measures will have a material negative impact on the economy. And it is equally clear (at least to me) that a significant economic downturn will hurt P&C insurers’ financial results. And lastly, that when P&C insurers’ finances decline sharply, there is an impact on their technology spend.
Let’s look at each link in this chain.
Regarding the material negative impact on the economy:
- You can believe your own eyes (whether or not you are in an officially “shelter in place” location like the San Francisco Bay Area).
- Or you can believe projections from JP Morgan and Goldman Sachs which both point to a significant contraction in Q2, followed by a rebound in Q3 and Q4
Regarding P&C insurers’ financial results, think about top lines and bottom lines.
- Fewer new cars, new homes, new commercial buildings, and new workers means less premium (other things being equal). More people, especially hourly workers, losing their jobs means more missed premiums, and eventually more cancelled policies.
- In the short term, insurers are unlikely to layoff many employees, so salary expenses will be sticky.
- Loss payments might be a bright spot. especially in personal auto as people stop commuting to work. On the other hand, fraudulent claims may increase.
- And last but not least is the impacts on investment income. P&C insurers have about 60% of their assets in bonds and 23% in equities. The short-term impact of the financial markets may be minor (assuming there is no wave of defaults). But if the current ultra low interest rates and depressed equity prices persist, the medium-term outlook for investment income is not great.
The impact on technology spending, is a bit of a mixed picture.
- Large underway projects, like core system modernization, are unlikely to be interrupted. Similarly ongoing data and analytics initiatives -- especially if they hold good promise to improve pricing, underwriting, or claims adjudication – will also likely also continue.
- However, smaller in-process initiatives which have a more tangential relationship to revenue enhancement or controlling expenses and losses may be slowed.
- The big question is how many midsize to large new initiatives will be started during the rest of 2020. If there is real progress in Q2 on containing COVID-19 and restarting those economic sectors that are hurting badly today, the Q3 and Q4 outlook for new tech initiatives should be reasonably positive. However, if COVID-19 containment and an economic restart in Q2 do not occur, then large new initiatives will have a much harder time getting C-Suite and Board approval.
Let us hope for good COVID-19 containment and economic news in Q2.
This blog has also been published on Insurance Innovation Reporter