The outbreak of COVID-19
has disrupted the global economy. The progress of the disease and its economic
impact is highly uncertain which makes it difficult for policymakers,
businesses and households to plan ahead of time. Little is known about the
medium- to long-term, micro- and macro-economic effects of such global
pandemics. But the recent Covid-19 outbreak places substantial urgency on
trying to gauge the likely economic impact. In this article, we use a history
of pandemics and the existing data on Life Assurance to project the future.
Previous pandemics that were traced with at least 100,000 deaths affecting the
globe are illustrated in the above table.
At the time of writing
this article, the number of deaths caused by Covid19 reached 79,235 across the
globe and the number of confirmed cases tolled to 1,353,361 people. Several
researchers have painted a picture of the short- and long-term impact of this
pandemic on the Life Assurance companies and Retirement Benefits Schemes and it
is against this background that we aim to navigate the Covid-19 Pandemic. Since
Life Assurance and Retirement Benefits are a critical part of one’s financial
wellness, this article relates to both individuals and corporations.
Many studies have found
that population health, as measured by life expectancy, infant and child
mortality and maternal mortality, is positively related to economic welfare and
growth. In terms of economic welfare, this article will look at individual and
corporation financial wellbeing. Life Assurance and Retirement Schemes are some
of the investment vehicles that individuals subscribe to with the major aim of
postponing current consumption to the future for themselves or their
beneficiaries in case of unfortunate events like death, critical illness, temporary
& permanent disabilities, or loss of income due to illness or retirement.
The current pandemic has
left many with the following questions:
- If I contract Covid-19, do I have the financial muscle to support myself and my family?
- If I die due to Covid-19, will my beneficiaries have something to survive on?
- Will my Retirement Benefit yield better return as earlier projected?
Africa has seen a
dramatic increase in its population since 2000, booming urbanisation, rising consumer
demand and an expanding middle class with more disposable income. This cohort
is becoming more aware of the value of insurance products as its spending on
life insurance products, health care and discretionary items also increases.
According to Sigma’s latest report, the African insurance industry is doing
well: from 2017, the continent’s premiums have been rising by an average 12.26%
against 4.01% on the global level.
According to many
executives interviewed for the 2019 Africa Insurance Barometer, Africa’s
insurance markets suffer from excess capacity, while technology continues to
provide new avenues for innovation, thus bridging geographical distances,
increasing scale and improving efficiency.
We at Minet, a trusted Pan-African risk advisor with a vast experience in this market, observe that members or households without a single life assurance cover might get in financial distress in case one or some of their members contract the virus.
We at Minet, a trusted Pan-African risk advisor with a vast experience in this market, observe that members or households without a single life assurance cover might get in financial distress in case one or some of their members contract the virus.
Covid-19 impact on Life Insurers & Retirement Benefits
A large number of claims
might emerge from the effect of this pandemic due to death, incapacitation or
critical illness if insurers add this ailment to the list of critical
illnesses. Claims might emerge due to death of policy holders (this applies to
all life covers), loss of jobs (in the areas of credit life assurance or
mortgage protection cover), and income replacement in the event that policy
holders are incapacitated or rendered unable to function as normal. Insurers and Reinsurers will have to feel the
pinch as the entire globe is affected. How seriously insurers will be affected
depends on how long the pandemic will last.
Insurers will not only
be exposed to large liabilities, but their assets may lose value when needed
most. Equities and fixed income assets like Treasury Bonds and Treasury Bills
in which most life assurance companies are over weighted, are likely to suffer
as business is affected by the pandemic. Economies are likely to move into a
recession for a number of years following the pandemic. SARS-CoV outbreak in
2003 demonstrated how even a short-lived pandemic can impact consumer spending,
confidence and investment. The economic cost of SARS was estimated to be about
$40 billion. The UN’s trade and development agency (UNCTAD) advised that this
pandemic is likely to cost the global economy $1 trillion in 2020 which is 1.1%
of the estimated global economy GDP ($90.5 trillion).
Various monetary and
fiscal measures have been deployed by several Central Banks to curb the effect
of the pandemic which include, but is not limited to, reducing interest rates,
unlimited loan guarantees and tax reliefs. Social policies like social
distancing and lockdown have furthermore been deployed to mitigate human to
human transmission. The stated policies are likely to impact the Return on
Investment by insurers and Retirement Benefit Schemes. Loss in value of assets,
mainly in foreign currencies, is unavoidable due to foreign exchange risks
which are on a rise due to the lockdown policy. Schemes like NSSF or any other
Retirement Benefit Schemes which diversified in equities are likely to have a
slowdown in their Net Investment Income (NII) due to the bearish nature of
equity prices at the moment. And, if they are to perform to their expectation
after the quarter ended 31st March 2020, they will need to make strategic moves
like buying into low-priced equities in corporations whose foundations are
believed to be strong for long term returns, or buying government securities
with higher rates of return than the Commercial Bank Rate.
In conclusion,
individuals and corporations are advised to;
- keep a close watch of the market; throughout history, markets have always come up again after a downfall in due time;
- understand their risk tolerance in order to allocate assets appropriately;
- diversify their asset portfolio to hedge against any risk that might affect returns;
- diversify; spreading investments over a wide variety of asset classes can help even out the ups and downs of the market; and to
- plan for the future by knowing their cash inflows & outflows, their current and non-current assets, and their liabilities (demonstrated by a balance sheet, income statement or cashflow statement).
Herman Male ǀ Senior Account Executive - Life & Pensions ǀ Minet Uganda
References:
-Alfani and Murphy (2017), Taleb and Cirillo (2020)
-World Health
Organization, Situation report-79
-Haacker, 2004; Robalino et al., 2002a; Robalino et al., 2002b; WHO Commission on Macroeconomics and Health, 2001:
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