The COVID-19 pandemic has often been described as “unprecedented” or “impossible to predict,” but the Australian Prudential Regulation Authority (APRA) had released a guidance document on pandemic preparedness as far back as 2006, in which it recognised the very real risk of an outbreak which could heavily disrupt business as usual.
APRA’s 2006 document called the scenario ‘unlikely,’ but nonetheless urged financial institutions to be “as prepared as practically possible for a potential pandemic.” APRA met with various domestic and foreign banks, insurers and superannuation administrators throughout 2006 to discuss their pandemic preparedness - however, APRA executive board member Geoff Summerhayes says its focus was primarily on the life sector, and that it had not anticipated a pandemic causing a total business shutdown.
“We proudly point to the guidance that we put out on pandemics, but the flaw of that was that we focused on the life insurance industry,” Summerhayes explained.
“We stress-tested that sector and we thought about it as an underwriting risk for life, we didn’t think about it as a business shutdown. I think this has been the challenge for us all globally - a ‘failure of imagination,’ which is a term that was used during the GFC.”
“We have learnt, as have economies all around the world, that we haven’t, to date, put a high premium on resilience - we’ve put a high premium on costs and supply chains,” Summerhayes continued.
“Being a regulator and talking about the need for capital and balance sheet resilience when times are booming, you can sound a bit like a broken record. But in times like this, resilience comes back into focus.”
Summerhayes also noted that despite how they have often been described, pandemics are far from a “once in a lifetime” event. He says the tail on pandemics can often span decades, and this means the insurance sector needs to critically rethink its approach to resilience.
“There is a view that this isn’t a rare event, and that pandemics are actually much more frequent events than is characterised,” he said.
“Often we hear references to the 1918-19 Spanish flu, but if you go through the list - there’s SARS, swine flu, Ebola, Zika, etc. There’s a reinsurance view that these are 25-30 year, on average, events.
“In that context, we should change our thinking and our approach to resilience and risk management to be far more risk-sensitive to such events than we have been. All of the indications are that we are going to live with many more pandemics going forward.”
