Insurers often speculate on Black Swan events, the ones that are so big and beyond what we might expect to happen they can change everything. General insurer and reinsurers have tended to think about massive earthquakes like ones hitting Tokyo and Los Angeles in the same year or global cyber breaches.
We have tended not to consider a microscopic virus as a trigger. A couple of weeks ago, I was at an industry breakfast function and people were looking at me in semi-surprise when I declined to shake hands and touched elbows. But things are changing very quickly indeed.
COVID-19’s pandemic status has created world-wide disruption, forced changes to people’s working and social lives, and destroyed trillions of dollars of investments. Business continuity plans (BCPs) and new health and safety measures are being re-drawn by insurers and others as the first line of defence to what is happening with alarming speed.
Initial reflections would suggest the general insurance sector with its traditional pandemic exclusions has anticipated and inoculated itself from too much damage. With traditional business interruption cover requiring physical material damage it limits exposure to insurers.
Of course, the impact of what we are experiencing will hit us as profoundly as anyone else. When trillions of dollars of investments are wiped off global stock exchanges and central banks move to lower rates even further, the revenue of the insurer balance sheet will take a severe hit.
If investment income falls sharply, the only other revenue source is premium income. However, if household incomes and businesses are under financial pressure expenditure on insurance may be sacrificed, putting further pressure on key ratios. How will we respond?
What then is the underwriting response to increased insurance losses from climate change events? There are indications that the southern hemisphere is shifting from an El Nino to a La Nina cycle which has been characterised by much higher insurance losses. And then over the longer term, we know there will be an increased frequency of extreme weather events.
Let’s consider what could be the impact of events on global capital. Will we continue to see capital flow into non-traditional reinsurance offerings as occurred through the post-GFC years. Does the argument still hold that general insurance is a non-correlated risk to an economic downturn? Should the non-traditional insurance market, funded largely by pension and hedge funds, retract then what may put more pressure on reinsurance rates?
Will we still be operating in an environment where rates can increase without a demand-side response, especially in the commercial sector which is dominated by small enterprises? Will we see a surge in liability claims as businesses fold and contracts can’t be fulfilled? If there are more work-from-home arrangements will that make our systems more vulnerable to cyber intrusions?
We shouldn’t be expected to have the answers to all these questions now as the focus is on ensuring we can remain operational through tougher times ahead. As time passes though, our sector should be asking itself how we can re-think our products to see if we can be more responsive to customers at these times.
As for the Government and its regulators, who are faced with the enormity of what is happening, they should defer major changes unrelated to responding to COVID-19 so financial institutions can focus on what they need to do to support businesses and households.