Known risk, unforeseen consequences.
Pandemic risk is certainly not new to the insurance industry. During the 2015 Business for Social Responsibility conference, themed ‘Resilient business, resilient world’, the then AXA Group chairman Henri De Castries stressed the increasing risk of global pandemics, explaining that “The transmissibility is higher than before […] The speed at which bad things can travel is getting bigger”.
However, 2Q2020 government measures that put 90% of the world GDP under lockdown were certainly unforeseen and have stretched the insurability of this pandemic risk.
According to estimates, the COVID-19 outbreak could cost $100bn of claims, ranking as one of the most expensive years for the industry. One could think that it will be a minor dent for this $5tn market, but most of these claims will be concentrated in a few lines of business, namely events cancellation, business interruption and trade credit insurance (TCI).
Because of the nature of TCI contracts and due to the unprecedented (but yet temporary) magnitude of fiscal stimulus from governments, the claims expenditure to TCI carriers and reinsurers will last until late 2021 and could reach $46bn. Those estimates are based on the great financial crisis precedent and the historical correlation between GDP, insolvencies and TCI claims.
This financial impact, together with the operational implications of lockdowns, definitely constitute a black swan event that will not only have an extreme impact on insurance but will certainly reshape the industry with far-reaching implications.
Product design, capacity and regulation
I have no doubt that the insurance industry will adapt products and wordings across all lines of business that will mitigate such pandemic risks consequences over time. The extent of the risk transfer and indemnification levels might not be as comprehensive as policyholders’ expectations from the outset, but this will be a learning process. COVID-19’s impact on insured lives and assets will also give plenty of simulation opportunities for data scientists to fine-tune pricing.
The notorious excess of reinsurance capacity might not flow quickly initially as reinsurers may start with a shy and prudent approach to this type of events. There will be a cost to it, but capital will be deployed over time. Governments have already provided capacity, on top of the private market.
Policymakers will probably make pandemic coverage mandatory, and not only for health insurance.
For TCI, the speedy and efficient deployment of government backstop mechanisms will be enhanced further.
Insurance players that were already engaged in digitalisation have been more resilient during the lockdown period. The gap will widen between pioneers and faster learners on the one hand, and late (reluctant) adopters on the other hand. For the latter, digital experience now becomes the top priority across all lines of business, but I believe those who have a holistic approach to digitalisation (ie, factoring omni-channel operating models, smart working for employees) will accentuate further their competitive edge.
Purposes and prevention challenge
The way insurers supported their policyholders during this historical period will stick in people’s memories and have a long-term impact on the industry’s brands and trust. I believe this period is a great test for carriers ‘purposes’ that are often advertised. In TCI, the fine line between trade facilitation and credit risk management will be stretched further.
As many market participants position themselves in the prevention territory by offering ancillary services beyond basic indemnification benefits, it will be interesting to observe the emergence of ‘resilience’ advice and prevention initiatives. M