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COVID-19 puts onus on insurers to re-evaluate capital and business plans

Insurance Consulting and Technology
COVID 19 Coronavirus

March 30, 2020

In a few short weeks the world has changed, and we find ourselves in a situation only dimly considered in the far tails of insurers’ operational risk distributions. In this short article we make some suggestions for what you should be doing right now, as well as highlighting what you do not need to do (yet).

With typical understatement EIOPA have declared that the current situation is a ‘Major Development’ (as referred to by Article 54(1) in the Solvency II Directive). As a consequence, businesses need to consider the actions that need to happen right now:

  • Understand how the balance sheet, the Solvency Capital Requirement (SCR) and the solvency position have moved since the end of the year. With the extreme levels of volatility in market values some firms are on daily or weekly monitoring and reporting.
  • Consider the various ways that the crisis could play out, so that you can mitigate the effects and develop a strategy that is resilient to the uncertainty.

…and equally those crucial actions that must wait for the situation to become a little clearer, such as re-calibrating models, correlations, dependencies and so on.

Understand the position and direction of your balance sheet and solvency ratio

The initial focus should be upon the solvency coverage ratio; what it appears to be now and how it might develop over time. Given the great level of uncertainty it would be sensible to consider this by using a range of top down scenarios.

The starting point is how the value of Eligible Own Funds (EOF) has moved since year end. Firms at risk of breaching the SCR or risk appetites should be planning any remediation to strengthen their solvency.

Some of the movements in asset values have been extreme and asset classes that have sometimes provided diversification, such as equities and fixed income, have been positively correlated at times – this does not mean that you have to worry about re-calibrating models just yet; that is something that can wait until later in the year. Companies should also be re-valuing future cashflows to reflect the changes in yield curves that have happened since year end.

Perhaps the only aspect of the SCR itself to re-consider – if you are an internal model firm – is the allowance for expected future profits that might be embedded in your model, and that have probably reduced your SCR until now. That said, this will also involve developing a revised plan for the year ahead (see below).

We suggest focusing any consideration of your current Solvency II solvency coverage ratio on the above level of analysis.

Estimate the insurance event impact

The exact impact of COVID-19 on insured liabilities is going to take some time to estimate – and the impact on your business needs to be considered at a bespoke and granular level.

It’s worth noting that market sentiment is currently that, at a market level, the impact is likely to be less than that of a major weather event – due to the large number of exclusion clauses that apply to the many of the insurance coverages. On a related note, the underlying exposures for many classes of business have suddenly been radically changed. For some lines of business this might result in unexpected insurance profits.

The business plan and scenario testing

Once you think you’ve got some idea of your current position, attention can turn to the future outlook. With economic activity crashing, the premium estimates in the business plan are probably looking unrealistic now. But with so much uncertainty about how things will play out, how can you come up with a credible revised plan? Our view is that you do not need to. Instead of trying to predict what will happen, consider the possibilities for what could happen.

The objective should be to not only assess risk but also work out future strategy and risk mitigation measures. This requires a top-down holistic approach where possible impacts on different functions (e.g. sales, claims, business planning, reserving, reinsurance, operations) are considered.

You can probably conceive of two or three scenarios of how the crisis could develop. For example, that society quickly gets a handle on things or that lock-down drags out until the end of the year. So, rather than trying to create a single plan, we recommend that you look at each of these scenarios and then try to construct a high-level plan/forecast for the business in each case. This has great value as management can then prepare for the different eventualities and develop a strategy that is resilient to the uncertainty.

For example, using these scenarios, the finance and capital teams can make projections of the level of capitalisation and solvency in each case. Here again, the focus can be on the balance sheet, with relatively simplistic adjustments made to the SCR rather than attempting a full recalibration. In parallel, there can be similar projections of rating agency capital requirements. Together, these projections can inform capital management strategy. For instance, to address questions such as should we continue to pay dividends? Or, do we need to raise additional capital?

When constructing the scenarios, it is important to test the resilience of the risk management framework and capital adequacy beyond just the current crisis. This will require consideration of extreme and stressed scenarios. While risk to investments is the area that is likely to be impacted most by the current pandemic scenario, the stress tests should also consider other events (e.g. windstorms) that could happen later in the year and further test the resilience of the framework.

Evaluate the alternatives

No-one can accurately predict how the crisis will play out. Instead, we recommend that you consider alternative scenarios for how the situation could evolve, estimate the corresponding impacts, and then identify the management actions that you would plan to take in each case.

Taking these critical and informative steps will put you in a position to make more considered and informed decisions, including responding to regulatory interest in what the COVID-19 upheaval might mean for your existing economic models.

To discuss how Willis Towers Watson might be able to help, please contact:


Gavin Hill
Director – Risk
Insurance Consulting and Technology

Paul Hewett
Director - Risk
Insurance Consulting and Technology

Adhiraj Maitra
Director - Risk
Insurance Consulting and Technology

Chris Bird
Senior Director - Technology Program Management 
Insurance Consulting and Technology

Mike Wilkinson
Senior Director
Insurance Consulting and Technology

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