The global spread of the SARS-CoV-2 virus made a profound impact in 2020. Experts have been warning for years that mistreated biodiversity, globalisation and urbanisation have long made another global pandemic a real possibility. For the vast majority, however, COVID-19 was unexpected. Indeed, even in an industry like (re)insurance that is built upon the management of risk and actuarial science, very few underwriters would have expected the utterly pervasive spread of the virus early last year or the subsequent impacts.
The total economic loss arising from the pandemic is estimated to be in trillions of dollars but is difficult to quantify accurately. This raises questions regarding the insurability of pandemics and the limits of predictive models for this type of global risk. For that reason, insurance policies in general explicitly exclude pandemics. By its nature, pandemic exposure has no geographic boundaries. A policy in New York and a policy in Dubai can be affected simultaneously and the individual cases are traced back to a single cause.
Before the pandemic, the last major global recession was caused by a financial crisis in 2007-2009. It began with the mortgage-lending crisis in 2007, leading to a global banking shock, before quickly cascading through every sector of the economy. Similar to the pandemic, the financial crisis triggered immediate support from governments, such as bail-out and fiscal measures to support recovery.
These two events differ in nature, relating to different dimensions of the human environment (economic, environmental, social and political). Both events were not foreseen, necessitating unprecedented government action. The environmental risk factor is rising in significance, with enormous potential to affect negatively the other dimensions of the human environment.
Last year was one of the three warmest years since 1850. The period of 2011-2020 was the warmest decade on record, according to the World Meteorological Organization. Greenhouse gas emissions are contributing to climate change, entailing a substantial increase in the frequency and severity of extreme weather-related events and natural disasters. On reflection, such global risks are affecting all regions around the world and the accumulation dynamics from these kinds of events and their complexity require detailed analysis in advance, not ad hoc reactions from governments. This poses a real challenge for insurers and reinsurers alike.
ESG: Sustainability metrics as a compass
The UN defined sustainability as ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs’. There are over 100 developing countries seeking ways of meeting their development needs but with the increasing threats of climate change, concrete and substantial efforts must be made to ensure that development today does not negatively affect future generations.
Environmental, social and governance (ESG) criteria were introduced to sensitise companies on the need to incorporate ESG metrics in business decision-making processes. In this respect, the ESG proposition creates value for companies.
ESG is beneficial to forests and wildlife and it is good for companies, particularly (re)insurers, by generating more underwriting and investment income while reducing costs such as legal expenses from stringent regulations. ESG criteria can stimulate new efforts to minimise vulnerabilities and ensure more resilience to future risks such as the extreme weather events, pandemics or social uprisings similar to the Arab spring in 2009/2010.
Tap new technologies
In this respect, new technologies such as digitalisation, big data and the internet of things can help to account for and understand potential future trends. Therefore, ESG as a sustainability criterion is not only a framework financial institutions may have to report on. It is a tool to create corporate value and at the same time to shape a better future.
This rapid emergence of new technologies also brings challenges. As cyber threats become more common and sophisticated, demand for cyber insurance is on the rise. Therefore, this should be seen as an opportunity rather than a threat. A dynamic landscape requires an equally dynamic and agile response. Each cyber attack helps the market develop a better understanding of the risk and this offers the opportunity for (re)insurers to come up with innovative products and expand into new market segments.
COVID-19 has reinforced the ESG framework as an integral part of a company’s corporate strategy and it is in our interest as (re)insurers that awareness of this continues to grow. A prospective view is essential. A look in the rear-view mirror is no longer enough; we need to manage the future before the future manages us. M
Mr Tarik Aouad is managing director, Middle East markets at Deutsche Rückversicherung.