Ensuring profitability is tricky for an insurer
The business of insurers is uncertainty, but how do you deal with uncertainty in a way you can be sure to remain profitable as a company? Before corona, most Belgian insurance companies were able to increase their revenues and profits. With -and after- corona, there are some extra challenges.
Insurers have two ways to make money. The first is the very essence of their business: price premiums to cover losses. The insurer is paid to take away the risk of the client. The trick is to keep rates competitive. The insurer needs to attract customers but also needs to make a profit. With optimal data and statistical models, the right balance can be found.
Second source of income are investments. The premiums are paid before the losses have to be covered, and in the meantime the money can be put to good use.
In both fields, before March 2020 and the big C, most Belgian companies did well. The sector as a whole made a net-profit of 2,46 billion euro, better than the years before. However that success is unevenly distributed among the different companies and the different insurance products.
2019 was a year with no major disasters or other damaging events. Of course, there were some problems. The ageing of society poses problems in for example life insurances. And in different insurance products, competition is fierce.
The stock exchanges were doing well, so there were nice returns on the invested capital. Although, more than in other countries, Belgian insurance companies invest a lot (71% of capital) in bills and bonds. After the financial crisis of 2008-2011 a lot of capital was invested in Belgian sovereign debt, safe but with a low interest.
There’s also the challenge of the changing world, a more globalised world and a more digital world. Insurance companies have to invest in preparing the future. Remaining competitive costs money. Being a leader in digital costs a lot of money.
The pandemic as of the beginning of 2020 changes several of the parameters mentioned above. It’s likely interest rates will remain low for a while longer, limiting the gains of investments. Investing in shares instead of bonds is a possibility, but the future of stock markets is less predictable than before.
Corona also had an uneven effect on the different insurance products. Travel insurance got into big problems, just as credit insurance, even with the public support for companies in financial difficulties due to corona. Also the revenues of many products decreased, as a result of the slower economy.
In the longer run the ‘corona-experience’ will continue to affect all aspects of the insurance business. But can insurance companies really complain about an increase in uncertainty?