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July 23, 2020

The century so far has been particularly hard on the financial services industry, with  the 2008-09 financial meltdown a decade back and the COVID-19 induced financial crisis today. While both these crises have one thing in common – the dark and gloomy state of global economy – the ongoing pandemic is also a major health crisis.

The banking, financial services, and insurance sector has to contend with a host of challenges which get even more pronounced during times like these. One such challenge is credit risk and its impact on financial markets.

The unabated spread of the virus has forced almost the entire world to go into a lockdown mode with minimal economic activity, which will – in all probabilities – push most of the economies into a recession. India is expected to remain in the negative territory in GDP growth as per RBI’s projections. With economies coming to a standstill, an increase in bankruptcy across industries and countries is very likely, and this will have serious ramifications for credit risk at banks the world over. To cushion the impact, central banks in various countries are reducing their interest rates and deploying financial stimulus to help businesses fight the crisis.

If we closely examine the life insurance and annuities space, we expect an increase in market penetration, especially in developing countries like India. As per the union budget 2020- 21, the insurance penetration in India is 3.7% of the gross domestic product (GDP) as against the world average of 6.31%.

Given the current scenario, insurance premiums are bound to rise. Since these premiums are typically invested in bonds and financial instruments, in the current scenario, it is very important to focus on insurers’ risk management practices and investment strategies. Diminishing interest rates will impact the profitability of insurance companies. Additionally, a portion of premiums is also invested in equity, which again, in the current scenario, is giving negative returns.

It is understandable in times like these for policy holders to be risk averse and move toward safer investment options as well as trustworthy insurance companies that can manage risk well.

The reserves required to underpin annuities and life insurance solvency become much more expensive as interest rates fall and dividends reduce. The price of annuities will therefore increase, and customers may perceive poor value. This could see the size of the market and the number of players reduce.

While financial challenges would remain, life insurance companies must ensure smooth functioning of their operations. There could be a significant increase in mortality rates in countries hit by the pandemic, with a slew of policy holders seeking financial support. Due to the reduced returns across financial sources, dependence on timely annuity payouts are bound to increase. It is therefore critical for insurance companies to operate in the best interest of their customers, which can be enabled by accelerating the digital adoption in the life insurance business.

The ongoing lockdowns have highlighted the need for a change in the operating model of insurance companies. The traditional, paper-based approach has been challenged to the core. Insurers that have not been able to adopt digital and flexible working practices have struggled to keep even core services running and their backlogs have grown tremendously. Some quick changes that we see coming to the fore are:

  • Digital adoption both for purchasing new insurance products as well as servicing needs
  • Check payouts being replaced by digital transfers
  • Acceptance of copies of documentation as opposed to originals, as well as digital signatures
  • Chatbots and intelligent IVR to reduce the impact on contact centers

While risk management is key for insurance companies, in order to be competitive, it would be wise to focus on being efficient as well. When markets and businesses do resume, customers would prefer well-managed companies to park their savings in. Technology would play a very vital role in shaping the business for the new world. The immediate needs of insurers would include:

  • Simplifying the overall product to ensure policyholders are able to understand and make an informed choice
  • Wider coverage of digital payments
  • Leveraging the huge volumes of customer data to deploy intelligent, rule-based automation solutions for underwriting
  • Automated solutions to simplify and automate claim payouts
  • Pandemic scenario planning tools

The COVID-19 crisis has accelerated digital transformation in the insurance space, with industry players exploring new business models to adopt a purpose-driven, customer-centric approach. In the post pandemic era, the focus would be more on ensuring resilient operations with a distributed workforce, while ensuring no compromise on quality and SLAs. This will require insurers to tighten their grip on risk management practices and aggressively pursue digital operations.

Vipul Bangard is the delivery head for life and pensions businesses for several of TCS’ clients across the UK, Europe, and the US. He has been with TCS for close to 20 years and has played multiple roles in the banking, financial services, and insurance (BFSI) business unit. In his current role, Vipul leads the life and annuity CoE for insurance operations. He is an associate member of the Institute of Chartered Accountants of India (ICAI), holds accreditations from the Chartered Insurance Institute (CII) in the UK for financial services, regulation and ethics and pensions administration, and is a certified Green Belt in Six Sigma.


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