There is much discussion on whether COVID-19 recovery will be relatively quick (i.e., V-shaped) or much, much slower. During these uncertain times, insurance company plans have never depended more on critical evaluations of external economic and social factors to develop appropriate responses.
Insurers have been best at planning for small, incremental changes. They forecast loss costs, interest rates, and expense loads primarily by using historical data. Most carriers start by targeting modest top-line growth and build their plans around that. Revenue plans are often based on the number of agents, product implementations, and often some wishful thinking. They also target expense reductions and incorporate the impact of strategic initiatives over time.
InsureTechs and more strategic carriers approach planning differently, making significant assumptions about sales, pricing, and support costs with limited historical data to support them. They usually incorporate external data on market size and competitors into these models. They often seek to be disruptive but assume little or no change to the world around them, other than the disruption they hope to create.
Some (but not all) niche markets will see significant disruption regardless of the speed of the recovery. This discontinuous change requires strategic revaluation of core value propositions, customer behavior and needs, and operating models. Most people agree that the post-pandemic new normal post will be different, but it is unclear how long it will take for the new normal to appear and how extreme the changes will be.
In times of uncertainty and rapid change, scenario planning becomes a much more critical factor for developing tactical and long-range plans. Scenario planning is a common practice in many companies, but the variety of scenarios will be much more dramatic during this year’s planning cycle. Laying out specific assumptions for at least three scenarios—optimistic, moderate, pessimistic—and evaluating the impact of each can clarify the relative importance of investments and the appropriate revenue and expense targets.
The answers to specific questions that each carrier should consider when developing planning assumptions will vary by targeted niche or line of business. Novarica has already seen personal auto have lower loss costs, resulting in refunds to policyholders, while premium levels for restaurant insurers have dropped dramatically. One size will not fit all, which will make planning much more complicated and require insurers to plan at the program level. Sample questions for each program or targeted niche include:
- How strategic is this target market to our long-term profitability? Should it be grown or abandoned to enable investment in other markets?
- Will the number of customers return to prior levels, grow, or significantly decline? How fast will these changes occur?
- How will retention be impacted given our current portfolio risk profile?
- How will workforce reductions and other exposure changes impact premium levels?
- Will the customer acquisition process shift dramatically to direct and digital? If so, are we prepared to respond to that shift?
- What changes in customer experience expectations are most likely, and how prepared are we to meet those emerging expectations?
- What new risks must we anticipate given changes in insured business models, e.g., work from home policies? What regulatory changes could impact those risks? Do our products meet those needs, and are they priced appropriately?
- Are our predictive models still valid, or should we reevaluate underwriting criteria? Can our analytics team support rapid revisions to models and continued roll-outs of new models?
- Will policyholder concerns surrounding recovery and uncertainty require more flexible pricing, usage-based policies, or different accounts receivable practices?
- Will higher unemployment lead to increases in fraud? Are we prepared to detect those changes?
- What competitors may decline in terms of financial rating, creating opportunities, and what competitors will grow based on digital capabilities?
- What costs can we shift from fixed to variable to provide greater flexibility?
There is no right answer to any of these questions. The value of this exercise is to determine whether the answers are extremely negative or very positive. How would it change your plans? What outcome is most probable? Leadership needs to challenge their organizations to think about these uncomfortable situations to develop appropriate plans and risk mitigation strategies.
IT planning, while not necessary at the program level, should also follow the scenario model. Significant changes in aggregate premium levels will require IT to adjust spending levels accordingly.
It has never been more important for IT leaders to work closely with their business partners to coordinate project governance and spending levels. Understanding critical gaps in digital processes, which projects yield the earliest benefits, and which are most advantageous under all three scenarios, will help prepare governance committees to prioritize investments.
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