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Underwriting as Industries Evolve

Examining the potential long-term impact of pandemic-driven changes

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    August 2021

    As a leading disability reinsurer, Munich Re Life US continues to examine the impact of the pandemic on the insurance landscape. We’ve noted that while some companies are coordinating returns to the office, others are shifting to hybrid models where employees will work from home either part-time or full-time. This shift impacts the employer making the change and creates a ripple effect on businesses and industries in surrounding regions.

    In this article, we delve deeper into a few industries where pandemic-driven changes are likely to have a long-term impact.

    As we continue to underwrite disability coverages, it is essential to consider the long-term implications to industries affected by the pandemic.

    As we continue to underwrite disability coverages, it is essential to consider the long-term implications to industries affected by the pandemic. If the risk profile of a particular industry, sector, or organization has changed due to the pandemic, requests for new or increased benefits on current business should be viewed critically. A good underwriter considers all the facts at their disposal and can constructively evaluate the risk holistically, considering the macro environment and external influences that aren’t always obvious.

    The following sections review developments by industry that underwriters should consider when assessing new or renewal business, noting that many developments subsequently impact other industries, and most industries will continue to evolve as they recover from the pandemic.

    Impacted Industries

    As employers assess their future needs, we can expect many changes to the traditional office environment, including the use of hoteling, where shared workstations are scheduled for short-term use. This may lead to office downsizing, as the need for square footage can be expected to drop significantly. Several recent articles provide real-world examples of this trend, which is expected to rise:

    In April 2021, the New York Times reported that many employers gave up office space and permitted more remote options.1 For example, JP Morgan Chase, NYC's largest private employer, expects to require only 60 seats for every 100 workers.1 Cushman Wakefield, a major commercial real estate firm, saw office vacancies in 2020 rise to 16.4% from 10.6% in May 2019.2 As a result of this decreased demand for office space, we anticipate that segment of the commercial real estate industry may be adversely impacted, in addition to the cities that rely on downtown workers for taxation and business activity. While most property owners survive on existing lease agreements, the actual impact is expected to surface as renewals come due.

    Estimates indicate that 17.3% of office space in Manhattan is currently available for lease, and prices have been seen dropping from $82 to $74 per square foot.1 The most impacted properties are those along the coasts, including New York, San Francisco, and Washington, D.C. Less foot traffic in impacted areas will also affect retail stores, restaurants, and other surrounding businesses such as apparel stores, dry cleaners, and grooming salons.

    Target announced plans to give up one-third of its office space in Minneapolis' City Center, where the retail giant has had a significant presence since the 1980s.3 This is expected to negatively impact downtown in many ways, including many of the same areas noted above and real estate values, mass transit patterns, and local restaurants and retailers.

    Many cities expect to revise their transit systems to align with future needs due to the reduced corporate presence in urban versus the patterns established nearly 100 years ago – a change we can expect to see in many rust belt cities.

    A recent Hour Detroit article cited additional changes impacting mass transit, such as moves away from urban cores, growing suburban communities, and more people working from home. Since March 2020, most transit systems in major cities have stopped their regular schedules. Those that operated at all were on a far more limited schedule and stopped collecting fares until recently. While initial changes were related to social distancing and frequent disinfecting, the deviations and unplanned costs created financial challenges for the transit systems.4 The industry has a unique opportunity to transform the entire concept of mass transit in urban and suburban areas.

    To stem losses as cities reopen, landlords in large cities are taking apartments off the market during the "rental slump," an old tactic is known as "warehousing".5 In Manhattan, median rental prices dropped by more than 17% in 2020, with concessions as high as 25% in luxury buildings. This activity is hitting the industry's income significantly and is likely exacerbated by the tenant eviction protections granted by local and federal governments.

    Real estate is not the only industry seeing a long-term impact. A recent Washington Post article revealed findings from multiple sources that anticipate millions of jobs may not return even after the pandemic, with several jobs expected to be replaced by automation and artificial intelligence. 6

    The remaining jobs would require far less travel and allow more flexibility to work remotely. McKinsey Global Institute suggests 20% of business travel will not return and, likewise, 20% of workers will not return to the office.6 The business travel and supporting industries will be affected, including transportation, hotels, ground transportation, and restaurants – which further bolsters concerns for the future of the commercial real estate industry.

    Furthermore, various office support and manufacturing jobs are expected to be permanently automated.  The pandemic accelerated the pivot to automation and digital platforms as retail sales transitioned to online, decreasing brick and mortar retail opportunities.

    In October 2020, the World Economic Forum issued The Future of Jobs Report 2020 that revealed the extent of expected automation and technology adoption to come, including robotics and artificial intelligence.7

    A few highlights include:

    • 43% of businesses surveyed expect to reduce workforces due to technological integration;
    • 41% anticipate using contractors for specialized tasks;
    • 34% plan to expand their workforce due to technical changes;
    • The number of jobs destroyed will be surpassed by the number of “jobs of the future” created;
    • By 2025, it is expected that redundant roles will decline from 15.4% of the workforce to 9%, while new professions will expand from 7.8% to 13.5%;
    • By 2025, 85 million jobs are expected to be displaced as roles shift between humans and machines;
    • Skills gaps continue to be high, as required skills across jobs will change in the next five years, such as those requiring critical thinking, analysis, and problem-solving;
    • The future of work has already arrived for many online white-collar workforces as the pandemic pushed digitalized work processes.

    The pandemic illuminated the need to be nimble, requiring retraining for roles that evolved. While training has increased, the window of opportunity to reskill and upskill workers has become shorter in the newly constrained labor market. Responsibilities have changed, and the core capabilities of workers will need to change as well. Core skills for roles expected to outlast the pandemic may vary by 40% in the next five years, and 50% of employees will require reskilling.7

    Despite current economic challenges, many employers will recognize the value and need for human capital investment. The World Economic Forum notes that companies need to invest in better human and social capital metrics by adopting environmental, social, and governance (ESG) metrics. While that sounds complicated, the hope is that companies will redeploy displaced workers rather than using standard practices of layoffs as a critical workforce strategy. The public sector needs to provide more substantial support for reskilling and upskilling at-risk or displaced workers for this to happen.

    The Future of Work

    The World Economic Forum also published its worldwide expectations for jobs in 2021 based on data collected from 15 countries and references LinkedIn's Jobs on the Rise report. The report revealed digital roles top the list of jobs on the rise in 2021, the most trending jobs can be managed remotely, and they expect 150 million new technological jobs over the next five years.8

    This shift to digital and remote opportunities is reflected in some of the top-rated new positions in e-commerce, including HealthTech and EdTech. Pharmacists, medical technologists, and information technology teachers will also be in high demand in the coming months. India and the United Arab Emirates have experienced a 197% growth in the hiring of digital content freelancers over the past year.8

    The pandemic has also led to a particular need for mental health specialists worldwide. The healthcare and social assistance sector is Australia's fastest-growing, employing more than 1.5 million people.8 In the United States, artificial intelligence is increasing to support various industries such as healthcare professionals, many of whom provide more services via telehealth.

    As we continue on the path to normalcy, industry transformations made to adapt to the new environment may persist and develop into longer-term evolution, which will impact how we view risks and businesses.

    A prominent area of focus across industries includes pushing for a higher minimum wage, which will continue to pressure industries that offer lower-wage positions. Former McDonald's CEO recently shared his perspective that a higher minimum wage can contribute to automation and erosion of roles in the industries most impacted.9

    Meanwhile, the Federal Reserve indicated that it believes inflation will increase. Treasury Secretary Janet Yellin stated that she also expects inflation to continue in the short term and expressed concern about its impact on lower-income families.10 We will examine the effects of inflation on Long Term Disability products and pricing in a future article.

    Disability Risk Considerations

    The disruption that occurred across industries impacts risks at all levels. And, as demonstrated above, many of these changes have a ripple effect on industries that may seemingly be unrelated.

    As we continue to work toward life post-pandemic, pressure to return to pre-pandemic sales volumes will persist; however, we continue to caution carriers to remain vigilant when underwriting impacted industries and identify opportunities with those that are thriving. Knowledgeable underwriters should examine industries that exhibit the most potential for profitable growth.

    Munich Re’s underwriting team has years of experience and will work with our clients to help accurately determine the level of risk for a potential case as industries evolve.  We help our client underwriters exercise prudence and due diligence by searching for the most up-to-date information and paying close attention to contract details.

    Areas of change, challenges, and unknowns are all pressure points for an underwriter analyzing risks in today’s environment. Developing a broad and detailed understanding of the economic pressures faced by businesses will be an essential element to surviving the current period profitably. Underwriters will need to leverage all available knowledge when determining better than average, average, and worse than average risks for the future.

    Contact the Author
    Matthew Clark
    Senior Underwriting Consultant
    Group & Living Benefits
    1Eavis, P., Haag, M. (2021, April 8). After Pandemic, Shrinking Need for Office Space Could Crush Landlords. New York Times.  https://www.nytimes.com/2021/04/08/business/economy/office-buildings-remote-work.html 2Persichetti, R. (2019, November 6). Manhattan Office Marketbeats: May 2019. Cushman and Wakefield. https://www.cushmanwakefield.com/en/united-states/insights/us-articles/2019-05-manhattan-office-marketbeats 3Kumar, K. (2021, March 12). Target to give up one-third of its office space in downtown Minneapolis. Star Tribune. https://www.startribune.com/target-to-give-up-one-third-of-its-office-space-in-downtown-minneapolis/600032974/ 4Winn, A. (2021, April 5.) Transportation Post-COVID: It’s Time to Transform Mass Transit. Hour Detriot.  https://www.hourdetroit.com/auto-transportation/transportation-post-covid-its-time-to-transform-mass-transit/ 5Parker, W. (2021, March 7). Manhattan Landlords Take Apartments Off Market During Rental Slump. Wall Street Journal. https://www.wsj.com/articles/manhattan-landlords-take-apartments-off-market-during-rental-slump-11615140000?mod=flipboard 6Long, H. (2021, February 17). Millions of jobs aren’t coming back after the pandemic ends. Washington Post.   https://www.washingtonpost.com/road-to-recovery/2021/02/17/unemployed-workers-retraining/ 7Zahidi, S., Ratcheva, V., Hingel, G., Brown, S. (2020, October 20). The Future of Jobs Report 2020. World Economic Forum.  https://www.weforum.org/reports/the-future-of-jobs-report-2020/digest 8Rooney, K. (2021, February 22). The most in-demand jobs for 2021. World Economic Forum.  https://www.weforum.org/agenda/2021/02/digital-ecommerce-jobs-linkedin-report/ 9Manfredi, L. (2021, June 7). Former McDonald’s CEO warns $15 minimum wage directly contributing to fast-food industry’s automation push. Fox Business.   https://www.foxbusiness.com/technology/former-mcdonalds-ceo-15-minimum-wage-automation 10Cox, J. (20201, July 15). Yellen sees ‘several more months of rapid inflation’ before easing, worries about housing impact. CNBC  https://www.cnbc.com/2021/07/15/yellen-sees-several-more-months-of-rapid-inflation-worries-about-impact-on-home-buyers.html