What happened 100 years ago? The Spring outbreak of influenza just over a century ago, was at 5 deaths per 1,000 persons, the Autumn outbreak was nearly five times that at almost 25, and the following year double at over 10. At its height, the Spring Covid-19 outbreak in 2020 saw mortality rates of less than a one-tenth in comparison.
What would the impact be on the financial services industry if Covid-19 followed the same mortality curve? Perhaps there would not be the same economic support package as before from the Government if we saw an October spike in 2020, how might the industry respond?
The impact of the medical emergency
The Covid-19 pandemic is causing substantial increases in mortality across populations worldwide. According to the World Health Organization, by 16th August 2020, over 770,000 confirmed COVID-19 deaths have occurred worldwide. The pandemic has overwhelmed health systems in many countries, potentially leading to increases in morbidity and mortality beyond the direct impact of Covid-19 infection. These increases in mortality, both direct and indirect, have the potential to cause stagnations or declines in life expectancy.
Life expectancy at birth in Madrid (Spain) in 1987–2018 and counterfactual in 2020 (Oxford University Press).
Exclusions and premiums on insurance policies
The world has seen other epidemics like Spanish Influenza, SARS, Yellow Fever, Ebola, etc. all of which caused economic losses. So, businesses can take out a pandemic insurance policy or at least add specific clauses covering losses due to epidemics into their policy. Pandemic insurance policies have huge premiums, and therefore, many insured do not opt for such policies.
Many policies contain a force majeure clause which excludes pandemics. If there is no specific clause excluding viruses or infectious diseases, then the insured can recover losses under such a policy. Expect policies to contain more virus or pandemic exclusions on renewal.
PwC believes that it is almost certain that insurance claims will rise due to the Covid-19 crisis, especially for insurers that offer specialty lines of insurance such as travel, short-term disability, business interruptions and similar. Also, Covid-19 could also have troubling impact on other areas such as long-term care insurance lines and alter anticipated loss ratios or disabled life reserves.
Insurers will have to make tough decisions about what is covered and what is not covered in those heavily impacted areas, and in almost every product category. Such decisions can have a big impact on the public’s trust in insurance companies.
KPMG believes that the impact of the crisis on general insurers will be limited, while the impact on health insurers will vary country by country. Health insurance premiums are expected to increase in 2021 in the range of 4-40% to cover the costs of the Covid-19 affected patients.
In addition, KPMG believes that life insurers will face the most difficult challenges of all insurance sectors. This will be the case because of the extreme volatility in the financial markets where life insurers hold a large amount of assets and liabilities.
It has become harder for customers to get “on risk” for life insurance, especially if they have had any previous symptoms of Covid-19, as insurers are postponing their decision on the application for cover or declining it.
Plugging the Pension Gap
Global stock markets have plunged significantly, meaning that many pension pots have shrunk and, while the government’s new scheme to pay wages for furloughed staff will take on employer contributions, it will only pay the minimum.
Covid-19 and the lockdowns have had a big global economic effect, as well as increasing mortality. Those who transfer their pension or withdraw cash from their pension pot while asset prices are depressed by Covid-19 are losers as are members of defined benefit schemes with a deficit whose employer fails due to Covid-19.
The increased mortality from Covid-19 will have a minimal effect on pensions, for now. If economies recover to pre-Covid-19 levels, the long run effects on pensions should be small.
The prospect in the minds of the public of taking the bet on 50 years on the treadmill of work existence to buy happiness in the last 16, is not looking like such a good bet these days.
In investments, there are those clients who would have experienced deep market downturns before, so will not be that shaken. The challenge for advisers is more likely to occur with individuals who panic and rush to sell because they may be relatively new to investing or are risk averse.
People are worried about their jobs and paying bills so talking about spending more money on products has not been high on their list, according to advisers.
Advisers are experiencing a fall in enquiries translating into policies. This translates into a loss of new business income, and a greater dependency on recurring income, at a time where ongoing charges are under greater scrutiny from the regulator.
Many people will have lost loved ones during the crisis, and this is likely to make them vulnerable. Also, in periods of market instability clients are naturally more concerned about their finances.
Unfortunately, the Covid-19 effect on markets and personal finances is making people more susceptible to financial scams than ever before.
The public are being trained to be more suspicious of product sellers. This, distrust together with loss of public trust in exclusion making insurers, and bankers breaking Government promises not to take payment breaks into consideration on new lending applications, increases levels of distrust in product providers and their agents, at a time when they are already the least trusted of all industries globally.
The economic emergency
As the Covid-19 pandemic continues to devastate the global economy, employers in large and small businesses are faced with a dreadful conundrum on whether to let their staff go, cut their hours, or declare them redundant. Working remotely is the new normal.
The coronavirus pandemic and the government response to its impact have had a significant effect on the UK labour market. Many businesses have ceased operating or have had to change their working practices, while recent government interventions have allowed for the furloughing of workers. In addition, the introduction of social distancing has also changed to the way individuals work or their ability to look for and find employment.
60% of the UK population now have no savings whatsoever and remain vulnerable in the event of another lockdown if the Government can no longer provide economic support.
The UK’s average unsecured debt of half average annual pay takes 25 years to pay off at minimums, loan companies and credit card companies are failing to extend payment holidays for a further three months for the majority, and look set to impose persistence debt rules next Spring; which will result in the suspension of lending facilities for many.
New data, published by the Department for Work and Pensions (DWP), reveals that 170,000 more single parents have been forced to claim the Universal Credit benefit in the first four months since the pandemic hit. Meanwhile, 285,000 parents who are part of a couple have enrolled for the benefit since the outbreak.
The figures mean that 58% of all single parents and 10% of couple parents are now claiming Universal Credit, and charities are warning of a child poverty epidemic.
Government statistics show that overall a total of 5.5million people are now claiming Universal Credit.
The social emergency
Researchers say the increase in mental health distress during Covid-19 has resulted in a spike in emotional response, that might stabilise or reduce as people adjusted to the restrictions imposed on daily life. However, as the economic fallout from the pandemic progresses, when furloughs turn into redundancies and mortgage holidays time out, the researchers say mental health inequalities will likely widen and deepen and must be monitored closely so that steps can be taken to mitigate against a rise in mental illness.
Similar trends can also be expected in crime, violence, divorce, suicide, social unrest.
The crisis has certainly diminished quality of life, health, economic stability, and social wellbeing.
The response of the industry
Due to the impact of the crisis on people’s confidence, advisers are going to need to call on their soft skills more than ever.
A recent survey by discretionary investment manager Portfolio Metrix into what advisers regard as the most valuable elements of their service, found that soft skills scored the highest and was ranked in the top three.
Empathy was the standout winner with 76 per cent of respondents including it in their top five.
Understanding a client’s life goals secured second place with a 49 per cent hit rate, while simplify and peace of mind shared third place with 47 per cent of the votes.
It is less about wealth management and preservation. It is less about long-term products. The financial plans needed today should aim at creating short-term wealth. Creating a certain income in uncertain times. The crisis is here. The crisis is now, not in later life.
Produce a financial plan for the client. Grow their wealth, remembering that products do not create wealth, they manage wealth. Clients create wealth though their entrepreneurial spirit. Create a passive income and that solves the problem of outliving your capital.
Financial planners must sell financial plans, not products. Plans to fix the immediate financial problem. Financial planners who sell products will be increasingly distrusted. There needs to be a wall between advice and product post-Covid-19 for there to be restored confidence in the industry.
Post-Covid-19 financial planners need to be non-intermediating.
Financial planners need to be life planners. Plan the client before planning the money. Increase happiness, inspiration, and entrepreneurial spirit.
Working from home, serving clients in their home. Online. No products equal no wet signatures, so it is easier than ever to go non-intermediating.
To find out more about becoming a non-intermediating financial planner visit:
http://www.academyoflifeplanning.com
8 life regrets by architype:
N: I never felt part of this world. Being awake was never fitting in. And the world is no better a place for me having lived.
NE: I lived my life as others expected me to live, and never true to myself.
E: I was always thinking of others, and never thought of the impact that would have on myself and my ability to sustain helping others.
SE: I was always good at getting things off the ground, but I was never a completer finisher.
S: I had a material life. I was so poor, all I had was money. I never had the important things that money cannot buy, like love, respect, dignity, honour, truth, friendship.
SW: I was always quantifying everything and never really thought about the qualities that life has to offer. I never allowed myself to be happy.
W: I was always thinking of myself, as if it was all about me. I was lonely and often despised. I never kept in touch with friends, I did not think it was that important.
NW: I worked too hard.
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