In his book The Plague, Albert Camus said: “There have been as many plagues as wars in history, yet always plagues and wars take people equally by surprise.”
It was no different with the arrival of the coronavirus. Although there had been many warnings from the scientific as well as the risk community that a pandemic was a realistic scenario, governments were mostly unprepared for COVID-19 and the speed with which it spread across the globe.
While a pandemic is first and foremost a human tragedy, there is also a deep concern about its impact on economy and society, on everyday life and ultimately even industries, such as the insurance sector.
Large protection gap for pandemic risk
Swiss Re estimates that COVID-19 and the subsequent measures to contain its spread may result in a loss of $12tn in GDP by the end of 2021. A loss of this magnitude goes far beyond the financial capabilities of the insurance sector alone.
In a first assessment of the impact of COVID-19 on the non-life insurance industry, Lloyd’s estimates that the 2020 underwriting losses covered by the industry will amount to $107bn. This loss has been revised downwards since and will still be below the $144bn in claims that the industry paid for damages incurred from Nat CATs in 2017. However, the challenge of a pandemic is in its correlation with other risks. The industry is expected to experience a significant decline in investment portfolios of an estimated $96bn, driving the total projected impact for the insurance industry to over $200bn.
The uncertainties concerning COVID-19 in the insurance industry remain high, and an end to the pandemic is not yet in sight. Thus far, insurers have communicated only $20.5bn of damages compared to estimates ranging from $30bn to $130bn of insured losses.
While losses from COVID-19 may well drag on until the end of 2023, AM Best has submitted the rated insurers and reinsurers to a stress test that also included insurers in the Middle East and Africa. The outcome was reassuring. Although most insurers are likely to see a hit to earnings in 2020, AM Best does not predict a material decline to the capitalisation of insurers’ balance sheets.
Focus on finding solutions
Camus further wrote in The Plague: “What’s true of all the evils in the world is true of plague as well. It helps men to rise above themselves.”
The insurance sector has to ensure that it remains a valuable partner to help mitigate the effects of pandemic risk. Initially, the discussion focused on the aspect of the exclusions – which was perceived as defensive – but now the sector is actively seeking solutions that would help extend the pandemic cover.
Finding solutions, however, will be a long-term challenge for the industry, yet, insurers have a broad experience in structuring risk-transfer solutions for flood, earthquake, wind and terrorism risk. For instance, following the 9/11 incident, new risk pooling solutions such as in the UK with Pool Re or in the US with the Terrorism Risk Insurance Act (TRIA) were set-up, providing a governmental backstop, due to the systemic nature of the risk, to maintain marketplace stability and share the substantial burden of losses with the private industry.