While it is too late for major preventative actions to mitigate the coronavirus as we did with Y2K, it is not too late to prepare for the inevitable next outbreak.
There is no industry in the world that is more synonymous with calamities or catastrophes than (re)insurance. This, ironically, seems to be attributable to its endemic nature, that is, insurance has to remedy part, if not all, of the financial consequences following an insurable event. Yet, be it a small or large claim, insurable or uninsurable, man-made or act of God, inadvertent or even reckless, insurance has always been looked upon by the public-at-large as its saviour.
As the whole world is now addressing the aftermath of the coronavirus, our insurance industry should learn from past catastrophes and calamities, and there is already plenty of those to recall from ranging from earthquakes, hurricanes and floods over the past centuries to the tragic events of Exxon Valdez, Chernobyl or 9/11.
In the aftermath of these events, much has been spoken or written in the insurance industry about better risk-mitigation methods which allowed the industry to survive and remain intact. So as a result, today we have more sophisticated catastrophe models, building codes have been fortified, laws on environmental liabilities got tougher and due diligence to counter terrorism increased.
While we fight the coronavirus pandemic and draw our own lessons, we should remember one particular crisis almost 20 years ago that was successfully averted – the Y2K.
For those too young to remember, the Y2K was a ‘millennium bug’ that went largely unnoticed for decades. Computer programmes had long represented years using only two digits, not four. This worked well for decades, but when 1999 turned into 2000, the fear was that computers would only see ‘99’ followed by ‘00’ and not be able to tell which year was current and which was past. Such a glitch might seem small, but if not corrected, it would cause major malfunctions in manufacturing, avionics and financial services to name but a few.
Pandemonium struck companies of all sorts in a race for time before computers ‘melt down’ as the clocks turned 00:00 on New Years’ Eve that year.
Yet when 1 January 2000 came around, there was very little impact. The world did not crash, and the threat was averted. This was not because the threat was not real; rather, computers kept working because experts and computer wizards worked feverishly with the goal of checking systems and fixing software.
Learning opportunities
While it is too late for major preventative actions to mitigate the coronavirus as we did with Y2K, it is not too late to prepare for the inevitable next outbreak. Nor is it too late to learn from other aspects of Y2K which can help us understand where we are heading.
- Painful as it was, mandatory testing saved the day at the end. As the Y2K date approached, many financial institutions ensured there was clear focus on software fixes and system integrity. We need to use the same kind of approach as the coronavirus curve flattens out, so we do not generate a major resurgence by lifting safety measures before we know the data calls for it. This is what the experts are telling us now, as they did in 1999. We need to listen today as we did then. As in 1999, it starts with a laser focus on screening and testing.
- The public trust is sacred and must be nourished in times of crisis. Then as now, there were many instances of panic or simply ‘fear of missing out’. Many stocked up on staple food, water and fuel, but it did not get out of control because governments, armed with credible data, provided trustworthy reports on progress. By September 1999, they were able to assure institutions that, while there might be some problems, things were going to be under control.
However, we do not currently have this same degree of transparency nor data, and the trust they engender. Throughout the MENA region, we have seen raw infection numbers just sky-rocketing without a deeper analysis on what the numbers behind all this testing really mean. For example, what is the underlying R0 (the number of infections estimated to stem from a single case)? Government credibility during Y2K was a huge asset, but this has now been countered by social media reports that mostly seemed to feed exaggeration and rage indiscriminately and irrationally.
- Insurance demand will not bounce back immediately. In 2000, we learned that fear and caution linger far past the end of a crisis. Many predicted that once Y2K was over, institutions would rush into buying new IT systems. Instead, after spending a lot of money to fix the Y2K problem, institutions decided to stick with their current IT infrastructure, and it was years before software markets returned to normal. It was a painful lesson, but one to remember for anyone who thinks the economy is going to suddenly jump back into hyperdrive. Dealing with the disruption must be our top priority now. The coronavirus and the consequent shutdowns have resulted in huge economic and social shocks which will linger on, but we need to proceed with caution and recognise that fiscal and monetary policy support will carry into 2021 and beyond and therefore insurance demand will not simply follow a V-shape recovery curve.
- We should build on the solutions that come out of any crisis. During Y2K, we created systems that could test the integrated functioning of financial institution systems with reliability. That was a critical benefit after 9/11, when systems shut down and needed to be brought back to life, often in different locations. The system testing from Y2K enabled us to do that with virtually no problems. With the coronavirus, this resurfaced again with companies working virtually while hot-testing their long-shelved disaster recovery plans.
- Even a crisis offers learning opportunities, and we should seek out these with the coronavirus. For example, insurers have utilised this golden opportunity to fast-track their digital platforms to interact with policyholders at all stages of the insurance cycle – from risk assessment, buying, underwriting up to claims inspection and settlement. This should lead to cost reductions and better services over the long run. The coronavirus has disrupted everything in the supply chain and created a dire need for social distancing. As we deal with this, we need to examine the solutions we are creating and determine if they may have broader and long-term applications.
- Perhaps the most important lesson from Y2K is that we can prevent many crises with appropriate planning and by relying on the experts who understand the issues. We did that with Y2K and created resilient systems that stood up to a major threat. The coronavirus, like never before, has converged many experts in the fields of sciences, economics, mathematics and humanities, all determined to contain the spread.
Outlook for MENA markets
Luckily, the pandemic-induced collapse in insurance demand will not result in a huge fall in profit margins for many MENA insurers in 2020; though obviously, there will be a reduction in gross premiums. This is somewhat akin to what happened in Asia with the SARS in 2003. Nevertheless, MENA insurers should still be able to post healthy loss ratios, since policy exclusions on pandemics, coupled with tighter policy interpretations on what may be admissible under business interruption policies, will shield them, unlike in the more developed Lloyd’s or US markets.
Even in acrimonious lines of business such as health, exposures to the pandemic may be limited to just testing fees. On the other hand, morbidity rates have been above or near normal in some MENA countries, but mortality rates have remained remarkably low throughout the region. Moreover, with already very low life penetration rates, life claims will be limited. Event cancellations and travel insurance would be the remaining areas impacted, but these would most probably be small in value and heavily reinsured outside the region.
Yet, from now and then, there has been increasing pressure by some governments on their home insurers to override policy exclusions and contribute, at least in part, to the overall social costs of the disaster. This last happened in the MENA insurance industry during the Arab Spring events when similar calls were made to indemnify against SRCC claims arising from the unrest.
Markets learned better afterwards and there was a clear demarcation of coverage or otherwise within the political violence insurance market. Such may occur too here, unless insurance markets seize the opportunity and establish disaster funds for future epidemic risks, or at least, supplement such risks alongside the long-awaited natural disaster coverage which is greatly in need throughout the region, especially in the face of much anticipated government austerity measures. If done, this will surely be a major industry landmark for years to come and will solidify the image and positive role insurers make in rebuilding regional economies once ravaged by such Nat CATs or pandemics. M