The Top of Mind series is an exploration of the COVID-19 pandemic’s identifiable and impending strain on the insurance industry. Developed by Academic Director Teresa Chan, the series presents insight on COVID-19 implications from lecturers of the M.S. in Insurance Management program.
In our sixth discussion, we hear thoughts from M.S. in Insurance Management lecturer Bob Percopo about investing and financial market performance.
What are the short and/ or long-term effects of this pandemic on each of the key operational divisions within insurance companies, intermediaries and reinsurers?
No one likes uncertainty and this is particularly true in the financial markets.
The media has been talking about money coming out of the banking system due to people hoarding cash in case ATMs go offline and there is a run on banks. This cash will be looking for a home once the fear abates.
Banks, equity funds and insurers always have a need to invest surplus cash. Once the COVID-19 hysteria subsides, the equity markets will surge.”Bob Percopo, Lecturer - M.S. in Insurance Management Program
Equity funds only have a limited time to invest, typically the first half of the life of the fund (“the investment period”). Fund managers have an incentive to invest quickly but carefully to maximize their returns. Banks and insurers have money to invest (either as debt or equity), and they will. Look at the lending growth after the Latin American crisis, the Asian meltdown, 9/11, 2008 financial crisis and now the virus, and how resilient funding sources can be.
Insurers like high fixed income yields since they are contractual returns if held to maturity. But the market sets the price, not any single investor. Debt yields as a general rule cannot match equity returns. The only option to achieve higher yields is to switch to equities, either public or private. Once this particular crisis is over investors will be aggressively looking for investments with expectations of high yields. The equity market is down over 30% and once sanity is regained the market will surge. Just as investors are advised not to sell at the bottom of a market, they also are fully aware of buying into a market that is or will bottom out shortly.
What about uncertainty? How do investors protect themselves against the unknowns – by turning to insurance.
The insurance industry mitigates uncertainty and the various products that specifically focus on individual risks as related to the financial markets.