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Sakate Khaitan
Khaitan Legal Associates, Mumbai
sakate.khaitan@khaitanlegal.com

 

The Covid-19 global pandemic was a double blow for the already struggling Indian economy. According to the World Bank, the current pandemic has ‘magnified pre-existing risks to India’s economic outlook’.

What began as a health crisis, quickly extended into a business crisis. Hardly any business sector has been left untouched by the Covid-19 outbreak: aviation, tourism, manufacturing, transport, banking, financial services and insurance (BFSI), and retail sectors top the list.

In March, India imposed a nationwide lockdown with the hope of containing the outbreak. The Indian lockdown, which lasted for almost three months, supposedly had the most stringent lockdowns the world had seen.

To steer the country through these unprecedented times, India’s central bank (the Reserve Bank of India) and the Indian government implemented several measures: fiscal, legislative and operational. The Government of India began a series of initiatives. All non-essential services in the country were halted (insurance was classified as essential), and an aid package of more than USD 260bn was made available with aim of creating a self-reliant India. Several labour law initiatives were also undertaken. Healthcare also witnessed a drastic shift with the opening-up of the telemedicine in India with remote treatments being made accessible.

In April 2020, India also changed in foreign investment policy to curb ‘opportunistic takeovers/acquisitions of Indian companies due to the current pandemic’. The revised policy ensures that all foreign investments from countries that share a land border with India will now be under scrutiny of the Indian Ministry of Commerce and Industry.

Challenges faced by the insurance sector

The Covid-19 has crisis raised both short- and long-term challenges for the insurance sector. Insurance companies were facing operational and procedural challenges, dips in revenue and depleting reserves as well as the mandate to meet the growing coverage requirements faced by the entire country.

Insurance players had to attend to concerns such as:

• business continuity: risks on an insurance company’s own existence was required to be planned for and several stress-test mechanisms were kick-started;

• employee wellbeing: while the insurance sector is moving towards digitisation, it is, and will always be, employee centric. With the government classifying insurance as an essential service, employers were required to strike a balance between working from home procedures and the requirement of face-to-face interactions with customers. This presented an increased exposure to the virus;

• crisis management: insurance companies are expected and required to monitor the evolving pandemic crisis and initiate all measures necessary to communicate to and manage employees and customers effectively. An insurance company is also required to maintain effective and frequent communications with regulators, customers, partners, agents, brokers, shareholders and so on, to build confidence and ensure continuity of service;

• capital adequacy: India’s insurance companies are required to maintain a prescribed regulatory solvency and ensure financial resilience. While unprecedented exposures are accounted for to some extent, the pandemic had the potential of sending balance sheets into a tailspin; and

• IT infrastructure and cyber security: with the increasing trend to remote access requirements, the challenges of building an appropriate IT infrastructure was demanded in a short space time. This heightened the risk of cyber incidents to which insurance companies were inevitably vulnerable and easy targets.

Regulatory challenges and initiatives

India’s insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI) has continually released several instructions and clarifications that steered the course of insurance responses to the pandemic:

• insurers were instructed to accept Covid-19-related claims under active health insurance policies,^[1] even though underwriting and actuarial procedures did not account for such increased exposures;
• the IRDAI advised insurance companies to extend the grace period for policy lapse or renewal by 30 days;^[2]
• specialised short-term Covid-19 health insurance products were launched with fixed benefits;
• standardised Covid-19 product was also launched to provide protection to a large number of employees engaged in manufacturing, services, small and medium-sized enterprises, micro, small and medium-sized enterprises, the logistics sector and migrant workers, catering to their medical needs; and
• several regulatory compliances were relaxed or had their deadlines extended by the IRDAI.

Covid-19’s impact on health insurance

The pandemic has driven the realisation of needing protective investments especially health and life. There has been a promising uptake of 30-40 per cent in health insurance adoption. The tipping scale has moved from health insurance being a ‘push’ product to a ‘pull’ product.

In the wake of the Covid-19 crisis the health insurance sector has seen tectonic shifts and has become the collective priority of businesses, the government, and people. The demand for health insurance has increased but underwriting thresholds have also seen a rise. India has been an under-insured country even though the mass insurance scheme – Ayushman Bharat launched for the poor, seemed to have significantly bridged the gap.

While in the short term, insurers have responded to the call for adequate coverage, concerns are rising in the long term and indirect effects of the pandemic. Experts have analysed that Covid-19 interacts adversely with pre-existing conditions, such as diabetes, renal and other chronic diseases and any effect may prolong conditions, also resulting in a longer trail of non-Covid-19 claims.

Furthermore, typical insurance policies and specifically the Ayushman Bharat scheme does not cover the impact of setting up isolation wards which would considerably increase underwriting assumptions and cost calculations.

On the other hand, newer products are developing and insurers may switch to developing specific products rather than standard wordings, while retaining the need for simplified policies.

Covid-19’s impact on different lines of business

Life insurance

The crisis is expected to result in customers rushing to increase cover. The market would see a reactive boost in demand in term insurance. Investment-linked products may not see major demand due to a volatile stock market.

Motor insurance

The car arena would see a lack of purchase of new vehicles and fewer vehicles in transit thereby reducing the chances of accidents resulting in a decline in new policies and reduced claims on existing policies. However, a dichotomy exists as social distancing is expected to persist for a long period of time causing a surge in private vehicles, particularly two-wheeler and low cost four wheelers, thereby increasing the need for insurance. A shift anchored by Covid-19 can be seen in new usage-based motor insurance policies. These were launched recently, to allow owners to insure vehicles for the distance they intend to drive.

Property insurance

A large impact on property insurance has been witnessed with the trigger of the 30 day no-occupancy exclusions of property damage insurance policies. This clause is likely to bring a large number of disputes.

Professional Indemnity

While work is being carried out at home, there seems to be an increase in potential vulnerabilities faced by organisations. Management is making decisions in the teeth of daily changing government policy. Actual or alleged breach of duty, negligent act, error, omission, misstatement, misleading statement, breach of warranty or breach of confidentiality, all are actions and/or inactions that may trigger a claim against an organisation.

Business interruption (BI) insurance

BI losses has been a major area of discussion during the pandemic. In Indian policies, property damage triggers business interruption losses and advanced loss of profits, therefore triggering disputes and debates over BI losses caused even without physical damage to property. In India, the market has not been tested as the judicial functions were largely suspended.

Directors and officers’ (D&O) liability insurance

In the wake of crisis, directors and officers may face a litigation from employees who may have contracted Covid-19 while travelling to work or while working in office premises. There may also be an increase in security class action suits where typically allegations would include:

1. failure to disclose or adequately disclose risks that company faced, or failure of the company to update prior disclosures as circumstances evolved;
2. inadequate steps to mitigate risks;
3. failure to observe recommended or required protocols; or
4. failure to develop adequate contingency plans.

Also, although many existing D&O policies may not be written with cyber and technology related risks in mind, the failure to protect against and insure for privacy or cyber liabilities could potentially lead to D&O liability.

Cyber insurance

A major boost has been seen and is further expected in cyber insurance due to a reliance on remote access and increasing risks and vulnerabilities.

Digitisation

The insurance sector has witnessed a massive shift towards digitalisation. The 2008 Global Financial Crisis propelled the redesigning of payment systems and processes and now Covid-19 has forced insurers to adopt remote and digital ways of working, which is undoubtedly set to drive a wider acceleration of technology adoption across the sector. This trend, of course, has been with us for some years, but the current situation will significantly expedite it.

Insurers have undergone digital transformation at the product level or specific elements in the supply chain but will now be urged to reprioritise spending on technology into InsurTech, digital distribution and technological infrastructure.

Conclusion

The Government of India and IRDAI did some quick thinking and rapidly responded to Covid-19. Even the insurance sector rose to the challenge and aligned itself with the larger objective of the government and IRDAI in alleviating the impact of the pandemic and its fallout on the policyholders. Unlike several other jurisdictions, where the insurance/financial services regulator became eager to intervene in existing insurance covers, especially in the area of business interruption; thankfully, the IRDAI has exercised restraint. However, now that the worst would seem to be behind us, the government and IRDAI should get back to rebuilding the insurance sector. India’s growth in recent years would not have been complete without a robust insurance sector, so the focus should be back on reinvigoration. Some work has already commenced but much more needs to be done.

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