According to UK insurer, Direct Line, the cost of Coronavirus-related travel insurance claims rose from £1 million to £5 million in less than two weeks between March 3 and March 15 2020, as the UK government advised against non-essential international travel.
Direct Line stopped selling travel insurance to new customers on March 13, along with AXA, Aviva and LV, as we reported in our blog here.
A number of countries have introduced bans on the entry of British nationals, and the UK government is warning people of travel restrictions that could be put in place at ‘short notice’. “An increase in claims following further travel restrictions … is expected, although it is too early to estimate the potential impact,” Direct Line said. “The group has implemented measures to help mitigate this, including pausing new travel insurance sales.”
In an effort to preserve the Group’s balance sheet, Direct Line has halted its £150 million share buyback plan, which was intended to fortify the Company’s solvency capital ratio. So far, £29 million of shares have been purchased under the scheme. CFO, Tim Harris, said: “Given the uncertainty as a result of Covid-19 we’ve taken the prudent decision to pause our share buybacks until the situation becomes clearer.” Harris went on to add that, “the Direct Line Group capital position remains strong,” and solvency has moved “as expected in line with our sensitivity analysis following recent market movements.” Direct Line has said it will be “keeping the position under review” to assess opportunities to undertake further share repurchase exercises in the future.
Insurers are required to keep solvency ratios above 100%, to indicate that they are able to meet all their liabilities. Direct Line has advised that its solvency ratio remained at 163% after allowing for the “effect of the recent deterioration in the financial markets on the group’s investment portfolio.”
The travel restrictions may actually prove helpful to other areas of Direct Line’s portfolio. For example, following the British government’s more recent advice against non-essential travel and working from home, the insurer expects fewer motor insurance claims in the short term, which could go some way to offsetting the losses being incurred on its travel book.
As this crisis develops, insurers are expected to continue to serve as shock absorbers for the economy and society. Direct Line has reported that it had reinsurance cover totalling £18.5 million for travel insurance claims and this will be a large part of how the Company is helped and indeed how the industry continues to spread its risk. But it is also likely that insurers will need to adjust their budgets and implementation plans, cash flow expectations, and investment portfolios in light of recent events.