Moody's: 3 long-term impacts financial services face due to COVID-19
Moody's identified three main areas that it expects will have an enduring impact on financial service providers.
COVID-19 has fundamentally changed the world’s collective definition of what normal looks like for the foreseeable future. Working from home and staying indoors as much as possible is now the reality for many while essential workers work to contain the spread of the novel coronavirus and keep economies from grinding to a halt; businesses are attempting to stay afloat as revenue streams are no longer flowing in at normal levels; terms like “social distancing” and “flatten the curve” are virtually in everyone’s lexicon, and much more.
While all the consequences of COVID-19 warrant attention, many are focusing on the economic impact it is causing. For financial services, much of the impact will be in the short term, but Moody’s Investors Service expects there “will be far-reaching longer-term effects that will fundamentally reshape many aspects of the macroeconomy, business life and consumer behavior.”
While many of the longer-term consequences remain to be seen, Moody’s identified three main areas that it expects will have an enduring impact on financial service providers.
First, it expects the resulting global economic recession to compel central banks to maintain low or even negative interest rates for several more years and to drive governments to increase fiscal stimulus with uncertain long-term consequences and varying implications for banks and insurers. For insurers, “lower interest rates will drag down investment portfolio returns, which also encourages them to invest into riskier securities or more illiquid asset claims.”
Second, a large-scale shift to digital services and a rethinking of old business habits will accelerate the transformation of business models and competitive dynamics. Although COVID-19 has forced businesses to embrace more digital services and remote work opportunities, many companies will likely maintain their current business operations even if and when a vaccine is developed. Additionally, many industries’ main takeaway from this pandemic will be a need to integrate technology even further going forward.
Third, the health crisis and economic hardship are increasing attention on corporate social behavior, accelerating a shift in focus to a wider range of stakeholders. Moody’s notes that some corporations are shifting their strategic narrative from shareholder primacy to greater emphasis on the needs of other stakeholders, such as employees, clients, society and the environment. It expects banks and insurers to be part of this dynamic. While the insurance industry will continue to protect itself against its obligation to pay by means of exclusions and policy wordings, Moody’s states that”ex-gratia payments may become an option in some cases to preserve customers’ perception of the relevance of insurance, and to avoid harsher societal or regulatory-led business repercussions.”
Of the three longer-term consequences identified in the report, Stephen Tu, vice president and author of the report at Moody’s, says, “The first and third will be the most impact to the P&C industry — the second to a lesser degree.” He adds that “as a result of the pandemic, insurers are also responding to greater societal and competitive pressures by refunding profits from expected lower loss rates back to their clients and extending pandemic risk coverage beyond their contractual liability.”
Related: