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Articles From Lumsden McCormick

COVID-19 FAQ: Insurance

The COVID-19 pandemic has caused widespread disruption to business operations across all industries. In the face of unprecedented uncertainty, insurers can play a pivotal role in helping businesses respond to the crisis. There are also specific measures that insurers can take to mitigate the financial impact on their business.

Here are answers to some of the most frequently asked questions for insurance organizations, along with relevant resources to help in their response to the pandemic and in planning for the future.

How are investors reacting to the crisis?

As one of the world’s largest investors, insurance organizations have been particularly affected by the extreme volatility in the equities market and freezing of the bond markets. As a result, investment advisors for the industry are adjusting their strategies and hedging activities to ensure continued capitalization, especially in light of a predicted uptick in COVID-19-related claims. It will be critical for boards to ensure there are robust risk management programs and business continuity plans in place going forward.  

In general, investors’ priorities have shifted in the wake of the pandemic as they seek stability during times of heightened uncertainty. To reassure investors about the value of their assets, companies can emphasize their crisis management strategies to show the specific steps they have in place to protect cashflow and navigate the business impacts of the pandemic. Shareholders are also stepping up their scrutiny of management and board activities, so it’s more important than ever to communicate about measures for financial resilience and a focus on future profitability.

Are there opportunities to engage with the public sector to help solve community problems during this time?

In responding to the global public health crisis, the private sector has shown its resilience and innovative spirit by working in tandem with the public sector to help address local and national challenges. For example, restaurants are helping serve free meals to children out of school and to the homeless, and manufacturers have repurposed supply chains to make sorely needed products like hand sanitizer and personal protective equipment.

For its part, the health insurance sector is eliminating COVID-19-related testing and treatment costs for patients in order to inhibit the virus’ spread. Individual companies are also giving financial support to local organizations that provide emergency care to vulnerable Americans. Health insurers have also been expanding telemedicine programs to encourage patients to get care from the safety of their own home and minimize the risk of COVID-19 infection in a hospital setting. Meanwhile, to ease Americans’ financial burden, numerous auto and homeowners insurance companies are instituting premium holidays for customers—extending payment deadlines without the threat of policy cancellation. Auto insurers are also offering discounts on car insurance premiums directly to consumers to reflect a significant decrease in claims because of stay-at-home orders. Leveraging your organization’s unique expertise and offering to collaborate beyond your own organizational silos for the greater public good is not only the right thing to do, it engenders consumers’ goodwill at a time when they are uncertain about their own financial futures.

Providing monetary assistance to community-based organizations is an ideal way for the insurance industry to help, as these organizations are best-positioned to address community-based problems, such as food insecurity and homelessness, that have been made worse by the crisis. Aside from direct funding, both public and private sector entities can work together by breaking down organizational silos to share intel and, in the process, empower local leadership. Doing so reinforces the concept of power to the edge, which involves the empowerment of individuals at the edge of an organization to positively impact the larger community. Power to the edge reinforces agility, better situational awareness, collaboration, and other principles key to persevering through and surviving beyond the pandemic, which could ultimately help your organization come out on the other side of the crisis stronger than before.

How can I best position my organization to both navigate the current challenges and thrive in the long term?

Insurance companies must be prepared for an extended crisis environment as the pandemic fuels significant threats, including cyberattacks, fraud, regulatory changes, supply chain disruptions, and bankruptcies. The industry faces some unique issues as well. Health insurers are seeking clarity on whether reimbursement support from the federal government can be expected for claims related to the testing and treatment of the virus. Life insurers’ actuarial personnel are trying to quantify how the virus’ mortality rate will affect future premiums. And property casualty insurers are weighing whether a recent decrease in claim frequencies will be offset by an increase in bad debt related to premium receivable. The economic slowdown will definitely impact the premium volume in the near future, reversing the growth trends experienced by all insurance sectors over the last decade.

In the short term, business continuity planning has taken center stage. Insurers are focused on setting up secure remote working environments to maintain both the safety and productivity of employees, as well as monitoring cash flow in order to continue operations. While it’s understandable that insurers are in ‘reactive’ mode, it’s prudent to take a step back and put together a crisis management team and response program that includes executive leaders, investment advisors, communications and account staff. They can help to methodically assess how to maintain operations while limiting exposure risks to employees and the customers they serve. Liquidity and sustainability must also be given careful consideration as short-term and longer-term decisions are being made. For insurance companies, the crisis should be viewed as a catalyst for needed change, as the sense of urgency, cooperation, need for innovation and decisiveness that emerges during this time can also help secure viability in the long term.

What opportunities could help us to mitigate revenue losses?

Loss mitigation will be top of mind for insurers and their clients alike. Policyholders will explore every avenue through which they might recover losses, so insurers will need to be even more diligent than usual in their claims review and approval processes. And in order to stem their own losses, insurers will need to become intimately familiar with how policy terms and exclusions apply to this unique crisis, as well as with recent case law that may give insight into what claims should and should not be approved. Insurance companies will also be looking to reinsurers to help them carry the claims burden.

Within the insurance industry, companies offering life insurance, health, business continuity, and trade credit insurance are likely to see the biggest impact from the pandemic. This is because yields on government bonds are dropping precipitously at the same time that claims are rising. These bonds make up more than half of the industry’s $20 trillion in global assets under management.

Many companies are also taking the opportunity to solidify their digital transformation strategy and make strategic and structural modifications to their businesses and products, which can help optimize processes and improve efficiencies. While these steps may not reduce losses, they can help companies operate more efficiently with lower overhead expense, which offers a more favorable competitive position than prior to the pandemic.

Should we be thinking about re-tooling our business strategy to capture new business opportunities?

Insurance companies will be front-and-center in the global economic recovery, for better and for worse. That’s because both businesses and individuals will be submitting claims to help them mitigate the impacts of COVID-19, in the form of trade credit and commercial property insurance, and health and life coverage, respectively. Insurance providers will likely be committing an enormous amount of resources to reviewing and processing these claims and, in some cases, resolving possible disputes with their policyholders.

One pre-COVID-19 innovation that’s likely to receive more of insurers’ sales and marketing attention is virtual solutions intended to reduce medical office visits. In China, one life insurance provider saw a ten-fold increase in registrations for its online health consultation app. They have also introduced into the market new low-cost insurance policies. It remains to be seen whether or not insurers in the U.S. will see a similar uptake, but in the current uncertain environment, it’s likely that companies will “wait and see” how the pandemic and economic disruption play out before attempting to identify and pursue new business opportunities.

What financial relief measures are available to my organization?

Companies of all types and sizes are likely able to leverage some aspect of the economic stimulus packages passed by the federal government. Brokers and managing general agents (MGA) that offer captive insurance policies to local customers – a critical component of insurers’ policy sales pipeline – may be eligible for two disaster loan programs under the CARES Act: The Paycheck Protection Program (PPP) and the Emergency Economic Injury Disaster Loans (EIDL) program.

The PPP is a forgivable loan program included in the CARES Act, which significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For brokers and MGAs facing financial strain as a result of COVID-19, these loans can help offset a variety of costs. Significantly, the loans will be forgiven so long as the funds are used to keep employees on the payroll and for certain other expenses.

The CARES Act also provides funds for the EIDL program, and it makes several changes to this program, which is available to businesses and nonprofits of all sizes in a declared disaster area. Currently, all 50 states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands have all been declared disaster areas for purposes of the EIDL Program. These loans are processed directly through the SBA.

While there are many opportunities available in the stimulus bills, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other implications. Given the level of complexity in deciding which relief measures to pursue and in securing them, it is critical for insurance companies to consult with professionals in order to maximize their savings and direct relief where it will matter most.

Employers who don’t take advantage of the PPP would be eligible for a 50% credit on qualifying wages paid to employees between March 13 through December 31, 2020, if they either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter, relative to a comparable quarter in 2019.

All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020. Organizations should also check with their applicable state taxing authorities for relief and updates on how states are coordinating with the CARES Act’s provisions.

In addition to government assistance, lenders, landlords, and vendors may be willing to give concessions on payments coming due that provide more favorable payment terms than usual. Insurance companies with a global presence should also look at what additional opportunities may be available in the countries in which they operate.

Which areas of the business present the most risk?

An influx of COVID-19-related claims—from testing and treatment of the virus for healthcare providers to cancellation claims from event organizers—is putting potential financial strain on these insurance sectors and could cause capitalization challenges for some organizations. Insurance companies should conduct a business continuity risk assessment, which includes an evaluation of any applicable “in-house” risks and third-party vulnerabilities with suppliers, vendors, and customers. In the short term, insurers’ risk profile includes the vulnerabilities associated with the unique nature of their business. Insurance companies should identify possible disruptions to operations according to this variable and others, and then prepare a set of processes to minimize the probability of each one.

In addition to planning for an increase in COVID-19 claims inquiries from customers, insurers need to ensure that sales channels remain unimpeded. Brokers and managing general agents who sell insurance policies through a local office may need help to process policy transactions while they work remotely.

Cybersecurity is another critical source of internal risk, and cyber threats have only risen during the crisis. The expansion of remote work creates more vulnerability and additional entry points for threat actors. The IT department can help protect against this risk by using tools for access control, audit control, intrusion detection and data loss prevention to ensure system security. Also, if remote workers need to access files on the network, using cloud computing with data encryption helps protect that data, and ensuring employees use a cloud VPN with two-factor authentication can prevent unauthorized access.

In the longer term, insurance companies must enhance their ability to anticipate risk before the next crisis occurs. They can use the current crisis to analyze their business’ resilience in its day-to-day operating environment and identify areas for improvement.

Are we secure from potential cyber threats both internally and externally?

Cybersecurity is a vital concern in a largely digital economy. For this reason, safeguarding against cyber threats is more important now than ever before. While insurance companies scramble to respond to the COVID-19 outbreak, the rate of telecommuting has increased dramatically, potentially increasing the number of network entry points. Cybercriminals have also become more aggressive, probing to exploit any vulnerability, and leverage new attack vectors. More than ever, it is imperative to take the necessary steps to monitor and protect against cyber threats.

Strong access controls ensure that only those who are authorized can access sensitive data, while audit controls track access to systems. Intrusion detection systems also monitor traffic across the network and raise alerts about any suspicious activity, making it possible to stop cyber threats as they arise. A cloud VPN for employees can provide secure access to the organization’s network and shared files and encrypt all data. Two-factor authentication further strengthens these protections. Internal threats are also a significant concern, but these can be mitigated by audit controls and intrusion detection. Staff should also be trained to identify any suspicious activities, such as phishing emails, and promptly report these to the IT department.

Faced with a litany of potential threats and limited resources, insurance organizations can benefit from threat-based cybersecurity. This approach identifies the most common attack vectors and focuses security efforts on protecting aspects of the network that are most likely to be targeted by threat actors. Insurance companies should also review their own cyber insurance policy to understand coverage and the potential costs of filing a claim. Lastly, firms must develop, review, and update incident response and business continuity plans as necessary, in order to remain responsive to emerging threats and vulnerabilities during a changing business climate.

What does our organization need to do to continue to protect personal data when employees return to the office?

Cybercriminals are aggressively exploiting the current crisis by, among other means, attempting to hack private and public WiFi networks being used by remote workers to access company resources. There is also evidence that Zoom and other teleconferencing platforms have security vulnerabilities. Insurance companies, which have always been a top target for cyberattacks due to the vast amounts of personal data they collect, should already have in place robust office-based cybersecurity and data privacy measures. These can be rendered ineffective, however, if they’re not supplemented with equally stringent teleworking policies and technology solutions like virtual private network (VPN) gateways.

Organizations that have not already reviewed cybersecurity guidelines, policies, and best practices with remote staff should do so immediately. Prior to welcoming employees back into the office and onto the office LAN, IT teams must identify any potential vulnerabilities and implement mitigation efforts, such as mandatory malware scans, to prevent cybercriminals from subverting office network safeguards. Corporate IT security teams should have someone on-site or otherwise remotely enabled to quickly spot and counter breaches of corporate systems, and they should remain in a heightened state of vigilance as staff settle back in at the office.

Finally, companies need to keep abreast of any changes (or the lack thereof) to data privacy regulations. For example, in Europe some countries have temporarily modified GDPR regulations in light of the pandemic.

How do I educate my front-line managers to appropriately lead in a virtual environment?

The two most important factors for managers to lead virtual teams successfully are care and communication. These considerations are not just relevant for employees, brokers, and managing general agents (MGAs) who have lost the boundaries and natural touchpoints of the office due to social distancing requirements. While call center agents, claims adjusters and other insurance employees and contractors are used to working in a remote environment somewhat independently, staying connected with all of your workforce is critical at this time.

The crisis has a significant human toll, and managers must prioritize their direct reports’ physical and mental health above all else. In fact, a VitalSmarts survey of more than 1,000 remote workers pre-crisis found that nearly half (46%) said the most successful managers checked in frequently and regularly with remote employees. Front-line managers can’t control the impacts of COVID-19, but they can leverage common collaboration tools to allow for streamlined communication and conferencing.

What does IT need to do to prepare for remote working? What remote working issues should I anticipate?

As insurance companies have been forced to rapidly shift operations and have all non-essential employees work remotely, their IT departments have become crucial to maintaining business continuity in the wake of unexpected disruptions. IT should ensure that employees have the training to use collaboration, communication and conferencing technology—whether this is Microsoft Teams, Slack, Skype, Cisco Webex or another option.

For security, staff also need training on how to identify suspicious activity, such as phishing emails, and promptly report such activity to the IT department.

Cloud computing is another vital tool that facilitates remote working by providing secure access to an organization’s network and shared files. Decision support systems in the cloud can facilitate greater productivity for employees. Using a cloud VPN can ensure that data is encrypted when employees access the cloud, and two-factor authentication strengthens that security. Employees should also be required to use company-issued devices for work purposes whenever possible, because personal devices may have unknown vulnerabilities or more lax privacy settings.

However, the widespread deployment of collaboration tools and cloud computing also increases demands on core network infrastructure. So, it’s important to ensure the network architecture can support these demands and that IT has the necessary resources. The expansion of virtual teams also introduces more potential points of failure between end users and the network, and it creates more user support needs as well. Management can assist the IT department with employee training resources and change management initiatives to encourage the ongoing success of remote teams.

What tax relief options are available to my organization?

In the short term, insurance companies should consider leveraging any tax strategies that can help offset costs and increase cash flow. The CARES Act also provides significant tax relief for insurers and companies, because it allows for net operating losses from 2018 through the end of 2020 to be carried back for five years prior to the loss. This effectively reverses some provisions from the 2017 Tax Cuts and Jobs Act, which had eliminated carrybacks for net operating losses for certain companies.

The CARES Act now allows companies to carry back net operating losses prior to the effective date of the Tax Cuts and Jobs Act, in addition to being able to use the previously applicable tax rate. This has additional benefits for insurance companies that can take advantage of applicable tax credits as a result of the carrybacks. The CARES Act also allows companies to file for accelerated refunds of excess alternative minimum tax (AMT) credits by allowing them to claim the refund in full for 2018 or 2019.

There are other tax savings opportunities for insurers in the government stimulus packages, including payroll tax credits and deferrals and tax-deductible charitable contributions. To determine eligibility for tax relief under the CARES Act, insurers should contact their tax professional for further guidance.

Insurers should also consider tax-saving measures that were already available prior to the pandemic, such as state and federal Research and Development (R&D) tax credits that can offset the costs associated with developing new technology. Companies that operate internationally should also assess the tax relief options being offered in the countries in which they operate.

While there are many tax savings opportunities available, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other tax implications that could affect an organization’s total tax liability. Given the level of complexity in tax planning during this time, it is critical organizations consult with tax professionals in order to maximize their savings and understand the long-term impacts of their tax strategies.

How is COVID-19 impacting deal flow?

Most management teams and investors are hitting the pause button on deal activity. The economic realities are changing fast, and so too are deal threats and opportunities. For insurance companies, COVID-19 has introduced significant risk, ranging from issues around capitalization due to a volatile investment environment to uncertainty around the prevalence of pandemic-related claims. Buyers, sellers, and lenders are currently assessing the situation and will be making decisions to proceed, adjust or discontinue deal processes based on critical factors including crisis management, performance outlook, valuation changes, and COVID-19’s lasting impact on the economy.

Ultimately, and hopefully sooner rather than later, the path forward will become clearer and many sellers will resume sale processes. To be sure, some will have to modify their approach or even take longer pauses. Every situation is and will be different.

COVID-19 FAQ: Insurance

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Jim has over 30 years’ experience in public accounting. He is responsible for financial statements, corporate tax returns, and preparation of all required reports as well as the supervision of staff that assist him. He has extensive experience with budgeting, financing arrangements, and implementing accounting policies and procedures for commercial entities including the construction and manufacturing industries. He is an expert in self-insurance trust funds, providing specialized forensic accounting services for more than two dozen funds including those for the New York State Workers’ Compensation Board. In addition, Jim works with private high schools and nonprofit organizations.

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