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September 8, 2020

The global economic downturn brought about by the COVID-19 pandemic has led to the lockdown of industries, revenue contraction, travel constraints, and large-scale unemployment across the globe. The global growth is projected at -4.9% in 2020. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars.

Insurance companies do plan for epidemics and natural disasters, but this one stumped one and all by its sheer severity and spread. One of the insurance segments that has been severely impacted is the lenders mortgage insurance (LMI). LMI is a specialty type of insurance that provides protection to financial institutions against losses arising from borrower default on high loan-to-value residential mortgages.

The LMI industry is facing a double blow: reducing mortgage insurance business, and the high number of claims spurred by defaulting borrowers. In the coming months, the conditions will only get worse as the full financial impact of COVID-19 on the LMI industry unfolds. To survive the pandemic purge and avoid a financial crisis in the future, LMI providers must take certain disruptive operational and strategic measures.

Some of the operational measures LMIs can undertake are:

  • Refine policy guidelines: LMI providers should review and further strengthen their policy guidelines. For instance, when doing area profiling, they must not only consider the creditworthiness of the borrower, but also take into account the property’s past, current, and future projected performance needs. Then there is the need for faster, accurate application screening and property data analysis process. Effective use of advance data analytics, artificial intelligence (AI), and machine learning (ML) can help identify potential regions and occupations that are under stress due to economic downturn, job losses, and so on.  This will not only mitigate the loss but also allow LMI providers to proactively reach out to lenders and extend support to distressed borrowers.
  • Liquidity management: Several economies worldwide are already in depression, impacting the liquidity of LMIs adversely; regular cash inflow has reduced substantially. LMIs must therefore invest in better cash management and forecasting solutions to get a clear picture of their revised liquidity requirements and a quick reassessment of inflows and outflows. Currently, an average company takes around 14 days to produce a single financial forecast. In the fast changing COVID-19 situation, forecasts become outdated even before they are released. A faster and adaptable cash forecasting model, backed by AI and ML techniques, which can provide results in a few hours instead of weeks, is much needed.
  • Automate internal processes: Quite a few LMI processes are manual and rely heavily on legacy systems; for instance, most calculations are still being done using excel spreadsheets and macros. In the event of a similar pandemic in the future, the non-availability of core staff for carrying out such functions will cause LMIs significant financial hardship.

To bring more resilience in the business structure, the need of the hour is to transform and digitalize the following processes:

  • Underwriting
  • Claims processing and  policy management
  • Actuarial calculations
  • Month-end closing
  • Financial and management reporting

As for strategic measures, LMIs must focus on:

  • Remodeling of premiums: For LMI cover, borrowers generally have to pay up front the full LMI premium, putting stress on their finances. The alternate option of LMI capitalization increases the loan amount, hence there is a need for premium remodeling. LMI providers should think of implementing a frequency based premium model similar to general insurance products, where premium is charged on regular intervals. This measure will not only reduce upfront financial burden but also help increasing the demand as more buyers will enter the market, who were earlier deterred by high LMI premium cost.
  • Establishing digital ecosystems: In today’s digital age, while on one hand the business environment is becoming hyper-competitive at an unprecedented pace, on the other, there is growing demand from the end customer for personalized services. To remain relevant, LMI providers must explore the possibility of nurturing digital ecosystems comprising of banks, financial institutions, brokers, valuers, credit bureau providers and borrowers, to provide on-demand, best-in-class experience to end customers. LMI providers can use APIs to embed products into other platforms or lender ecosystems, as well as offer products and services in open marketplaces. This will not only help retain existing customer base but will give access to new customers.
  • Deploying such digital ecosystems, implementing robust governance and control measures, and securing remote workplaces will help futureproof LMIs against COVID-19 like crises in the future. However, before LMIs invest in these operational and strategic measures, they have to ask themselves a few questions:

1.     How do these measures fit with our future business plan?

2.     What can we learn from other insurance companies who have implemented digital ecosystems?

3.     What capabilities do we need to implement these changes?

4.     Do we have the budget to go ahead with the transformation?

5.     How can we attract the right talent to implement the aforementioned measures?

Well-thought answers to these pertinent questions will help them navigate the challenges and make sure their investments bear fruit.


Debaditya Gupta is part of the Finance and Reporting practice of TCS’ Banking, Financial Services, and Insurance (BFSI) business unit where he heads the IFRS 17 initiatives for the ANZ region. He has over 14 years of industry experience in the areas of finance, insurance, mortgage securities, treasury, IFRS, and US-GAAP. A chartered accountant by profession, Debaditya has an MBA degree in Finance from Symbiosis University, Pune, India.


Deepak Soni is part of TCS’ Banking Financial Services, and Insurance (BFSI) business unit. He has been with TCS for more than 16 years, working primarily in insurance and banking domains for India, Europe, and ANZ geographies spanning consulting, program management, and customer relationship management. He has a Masters’ degree in Computer Applications from Rajiv Gandhi Proudyogiki Vishwavidyalaya, University of Technology of Madhya Pradesh, India.


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