The impact of the COVID-19 outbreak can be seen in almost every aspect of our working and personal lives. The IFoA is looking at how the profession can meaningfully contribute to the fight against COVID-19, and has set up a hub of information from IFoA members and other organisations, as well as a place for actuaries to discuss the impacts of the pandemic in more detail.
The pandemic has also had an instant impact on the UK and global economies, as well as the financial services industry and its customers. From a policy perspective, we are already seeing individuals and institutions struggling to cope with the many financial risks they face at this difficult time. Our 2020 campaign, ‘The Great Risk Transfer’ looks at how risks that used to be shouldered by governments, financial services providers and employers are being transferred to individuals. We expect these risks will be exacerbated as a result of the current crisis.
In this blog, the policy and public affairs team explore out how every area of the IFoA’s policy work is being impacted by COVID-19.
Steven Graham – Technical Policy Manager, Life and General insurance
“As might be expected, the COVID-19 crisis is presenting an unprecedented challenge for the insurance industry, and of course, their insurance policyholders. As COVID-19 started to play havoc with travel plans, it became clear that travel insurance would be impacted. The Association of British Insurers (ABI) is now expecting a record travel insurance claim pay-out to be made. However, since the implementation of social distancing measures, many businesses have also looked to their business interruption insurance for help. This is more of a grey area, as this type of insurance cover doesn’t necessarily include losses arising from pandemics. To help provide some certainty here, we expect a joint approach by the insurance industry and Government. Individual policyholders will also be looking to their income protection or medical insurance cover in this time of challenge.
Life insurers are also not immune to the crisis. COVID-19 has affected insurers’ balance sheets, with equity markets and corporate bond valuations adversely impacted by the increase in market uncertainty and volatility. Some commentators have also suggested a global recession is now much more likely. The impact on an insurer’s balance sheet will depend on their asset mix, and also the extent to which claim and expense pay-outs increase, and premium income decreases. However, many insurers are likely to retain capital buffers despite these factors, even if solvency is depressed. Where applicable, any increases to the Solvency II Matching Adjustment and Transitional Measure on Technical Provisions could also help mitigate solvency pressure.
The longer term consequences of COVID-19 on the insurance industry are hard to predict in these still early days. It remains to be seen what the impact on mortality/morbidity rates will be, or indeed insurer business models/ resilience. In an increasingly globalised world, there is much to learn from this current crisis, and the insurance world will hopefully reflect and adjust to life post COVID-19 when that time comes.”
Catherine Burtle – Policy Manager, Pensions
“In the world of pensions, the economic hit caused by the COVID-19 outbreak will mean different things to different people. Hopefully for most, an economic downturn will be just one bump on the tumultuous road that is long-term investing. As someone whose pension pot will likely be invested for another 30 years, I expect my DC pension will face similar bumps on numerous occasions between now and my retirement. Hopefully I’ll recoup some of the short-term losses in brighter economic days ahead.
We talk a lot about pensions in our Great Risk Transfer project, and the current crisis is shining a light on some of the inherent risks and uncertainties that all savers are exposed to when saving for retirement. With luck the ‘DC Generation’ will absorb this shock, but the crisis may also draw attention to just how exposed individuals’ nest eggs really are, to the ups and downs of the global stock market.
But there are some groups for whom COVID-19 will have a more serious impact, in both the short- and longer-term.
For DB scheme members, the likely financial shock caused by COVID-19 could spell double misery, particularly if employers go bust as a result. An important time then to ensure the PPF is in good health.
Those closer to retirement will have tough decisions to make, with less opportunity for funds to rally before they approach later life. Those already drawing down from their pension pot will also be feeling the impact of the recent turmoil in the stock market. We’ve seen calls for a temporary pause to DB pension transfers as the economic turmoil makes it difficult for trustees to accurately assess the underlying value of the fund. The Pensions Regulator recently announced a three month freeze to give trustees time to consider requests.
The Government has also agreed to cover national insurance and pension contributions for workers covered by the Coronavirus Job Retention Scheme. But what will be the longer-term impact for those who are strapped for cash or made redundant as part of the pandemic crisis, for whom their pension is likely to be low down a long list of urgent financial priorities?”
Matthew Levine – Policy Manager, Finance and Investment
"Both globally and in the UK, the coronavirus outbreak looks set to inflict major economic damage. One asset manager forecast suggests an adjustment from 2.8% global growth to a contraction of 0.5% in 2020. Even that assumes that things will start to improve in the third quarter of the year.
In the UK, the Government has acted quickly and dramatically to protect the economy. For example, there have been measures to ensure liquidity in the financial system, such as reducing already-low interest rates to 0.1%, and the resumption of Quantitative Easing.
The Government has also announced direct help for businesses, especially the commitment to cover 80% of salaries of those on leave of absence up to £2,500 per month. This reflects an awareness that allowing small firms to fold would prolong recession.
While the short term pressures are severe, some are urging investors not to forget longer term priorities. The IFoA is a signatory to the Principles for Responsible Investment (PRI), and the PRI advocates a focus on ‘systemic integrity’ and ‘long term universal returns’, as opposed to the relative performance of companies. The PRI also suggests that companies should put employee needs over those of shareholders at this time.”
Faye Alessandrello – Policy Manager, Resource and Environment
“The COVID-19 outbreak has changed the world as we know it. Restrictions on all but essential travel have seen flights being cancelled or turning around in mid-air. People are confined to their homes as strict lockdowns have been imposed. The daily commute is now a quick walk to kitchen table or home office, and socialising with friends is now a video conference of a Saturday evening.
An unexpected consequence of efforts to contain the spread of COVID-19 has been a reduction in greenhouse gas emissions. Analysis performed by Carbon Brief found that in China, the world’s largest carbon emitter, the actions taken by authorities led to 25% reduction in carbon emissions over a four week period. Separate analysis from Rhodium Group found coal consumption by China’s six largest power plants has fallen over 40% since the last quarter of 2019.
The implementation of similar strict measures in other parts of the world, accompanied with the cancellation of international travel and events, may lead to the first fall in global emissions since the 2008-9 financial crisis. However, this is a far cry from the decarbonised, sustainable economy that the IFoA advocates for.
History tells us that the current dip in emissions is unlikely to last. A reduction of global emissions of 1.3% experienced during the financial crisis of 2008-09 was short lived, with emissions sky-rocketing as the economy recovered. The government could look to prevent such a pronounced rebound in emissions this time around if its efforts to simulate the economy are focused on green finance and investment.
With many commentators remarking that the world can’t go back to normal following the COVID-19 crisis, it is perhaps time to forge a new normal. A normal which will enable us to tackle the climate crisis, the other great uncertainty facing our world.”
Rebecca Deegan – Head of Policy, Health and Care
“The impacts of COVID-19 on the health and care sector are numerous and significant. NHS frontline staff are being reinforced by the return of recent retirees (for whom certain pension rules have been suspended), there has been a call for ‘an army of volunteers’ from the NHS, and on top of this the third sector and community groups have rallied in their hundreds to support those vulnerable people who may not be able to go out to get prescriptions or food, or who are at risk of loneliness as they self-isolate.
On Budget Day, the Chancellor said “Whatever extra resources our NHS needs to cope with COVID-19, it will get. Whatever it needs, whatever it costs, we stand behind our NHS”. The concrete expression of that pledge is the COVID-19 Response Fund. The fund sets aside £5bn to help the NHS, local authorities, and others in the public sector needing to spend extra to keep important public services running as smoothly as possible.
Of that £5bn, £1.6bn was ear-marked for local authorities to help them respond to other coronavirus pressures across all the services they deliver. This includes increasing support for the adult social care workforce. But according to the Local Government Association adult social care already faced a funding gap of £1.5 billion this year, resulting in over 1.5 million older people already having unmet care needs. I raise this in the middle of a crisis because the Coronavirus Act overrides the Care Act and includes powers that will enable Local Authorities to “not meet everyone’s needs in full and delay care assessments”. The measures in the Coronavirus Act could leave many more without access to care services and is a further demonstration of the limitations of care provision in the UK.”
Katy Little - Policy and Public Affairs Assistant
“It has been sobering to watch various Government ministers and senior advisers address the nation over the last few weeks, in a series of addresses designed to update, stir and prepare the nation at a time of national emergency. The draconian, although necessary, measures employed by the Prime Minister and his Cabinet over the past weeks demonstrate how unprecedented this pandemic really is.
The Government’s formal response to COVID-19 has now been enshrined within the Coronavirus Act - overarching emergency legislation which took just three days to pass through Parliament. It introduces extraordinary and sweeping powers, never seen before in UK-peace time, some of which we have already seen the Government exercise in practice.
In addition, the Chancellor has had to dig deep to find more cash to support businesses and individuals struggling to cope with the economic pressures caused by the crisis, just weeks after delivering his first Budget. At the time, commentators were already taken aback by the Government’s spending promises, which directed £12bn specifically targeted at the coronavirus response, including at least £5bn for the NHS in England and £7bn for business and workers across the UK.
Further support has since been given in the form of the COVID-19 Business Interruption Loan Scheme and the COVID-19 Corporate Financing Facility, with an additional package for the self-employed which is expected to reach them in early June.
This week the IFoA joined a call with John Glen MP, Economic Secretary to the Treasury, where the Minister set out how Government is working with the financial services sector to support businesses and the wider economy. It is clear that HM Treasury is working hard with other Government departments, regulators, central banks, industry bodies and firms, to ensure the Government’s financial response to the crisis is effective and targeted at those most in need. And like his colleagues at the daily press conferences, he was at pains to impress upon those listening that Government is doing all it can to support UK businesses in these unprecedented times.”
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