How we - the insurance industry - can help build a more resilient world in the wake of COVID-19
A global health crisis has long been on the cards. Why, then, does COVID-19 seem like such a shock?
Scientists, historians, filmmakers and insurers: each in their own way made frighteningly accurate predictions about a pandemic that would wreak havoc on the global population and economy.
Here at Swiss Re, for example, we have a pandemic model which estimates the impact on mortality in many different scenarios. While the death tolls from COVID-19 are painfully high, they are consistent with the modelled outcomes from such an event. Additionally, our models envisioned every material economic fallout from a pandemic, including the attendant impact on insurers which included increasing their liabilities as claims rise, as well as volatility on their asset portfolio and ultimately their capital adequacy.
So why – given these predictions – did insurers, along with governments and most businesses, fail to prepare better for this pandemic? Quite simply put, despite all the evidence, it was far easier to perceive such a situation as an unlikely event, because to deem it likely would be a call to action.
As the reality of the devastation wreaked by COVID-19 dawns, it should serve as a rather expensive lesson which spurs us to manage this type of systemic risk better in the future. And we – as an industry – need to work harder and smarter to change our offerings relating to high-risk but low-probability events.
Hindsight, as we all know, is a beautiful thing. It was difficult to alert the wider world to the risks of a pandemic because people generally don’t want to believe that these things will happen, especially when believing necessitates action.
Behavioural economics tells us that humans tend to focus on the short-term outlook, quickly forgetting the lessons of the past, and underestimating vulnerabilities when faced with future disasters. Added to that is the inertia that prevents people from changing the status quo, especially when the various protective measures on offer are uncertain by their very nature and consume resources.
This means we need to do much more than tweak existing products. Rather, we need to integrate these behavioural traits into our products, right from inception and design, so that the final product will fully reflect customers’ less forward-looking instincts while addressing what we assess are individuals' actual needs based on our historical models and projections.
It’s all about working hard to strike the right balance between the cost analysis that make a product feasible and the human dimension that shapes everything else.
The cost factor
Some pandemic-related insurance products have, of course, been developed previously and offered to customers, but the take-up rate for products requiring affirmative buy have been rather poor.
And although our annual SONAR Report starting in 2013 had predicted a pandemic, and while economic fallout was anticipated, the systemic economic impact of a coordinated global containment response, and the subsequent scale of business interruption losses, was underestimated because the true scale of how connected the world has become and how easily contagion could happen was not fully understood.
Now that the scale of the losses (assets and liabilities) is becoming clearer, we need to actively price what has happened into our risk management products. This includes consciously deciding what is and isn't covered and having the right checklists in place to fully manage real exposure.
Science tells us that serious pandemics occur roughly every 30 years, which means they are not really as rare as we think or act. So we need to listen to this advice and plan accordingly, making sure we are properly charging and pricing for such exposure.
Awareness and pooling knowledge/risk
To elaborate a bit on the role awareness plays, we can contrast pandemics with truly catastrophic hurricanes, such as Hurricane Andrew that are relatively rare. But because weather events are a common occurrence, they help insureds build an understanding of losses. Which in turn drives demand for insurance products affording appropriate coverage.
Countries in Asia responded quicker to COVID-19 than elsewhere in the world, partly because they have experienced other viruses such as SARS in recent times, so they had clear plans in place in preparation for the big one. In retrospect, the opportunities were there to leverage the experience and resulting plans from Asia, with re/insurers similarly looking to transfer knowledge and practices to be better prepared.
One of the ways of doing this is to work alongside governments, increasing awareness, access and affordability to both individuals and businesses. The systemic nature and scale of a COVID-19 type pandemic is not something the insurance industry can shoulder alone. But – as with terrorism risk – we can work alongside the public sector to pool the risk from such events. Governments need to take on explicit liability and help build a mechanism that allows us to re-price pandemic risk.
There are already at least 100 permutations of re/insurance pools globally that could be adapted to deal with pandemics. Public-private pools could cover non-damage business interruption (NDBI), bringing certainty to exposure that is usually exempted from standard insurance policies, thereby addressing a gap in coverage.
The insurance industry can also contribute its loss assessment, claims management expertise and payment infrastructure to channel compensation effectively to entitled people and businesses. This would make better use of taxpayer's money than the ad hoc measures many governments have had to put in place to distribute funds.
Collaboration not confrontation
Our industry plays a vital role in the global economy by providing protection against known risks. But insurance companies are only as strong as their balance sheets and, while these are very robust, they are not infinite.
In some jurisdictions, insurers are facing the risk of being hit with lawsuits and legal statutes forcing them to retroactively pay out for COVID-19 losses not covered by existing policies. This type of action is a threat to the whole industry and, by extension, to global financial stability.
A confrontational approach will help no one. Instead we need to work more closely with policymakers, scientists and our customers to ensure better risk management for future systemic risks.
It’s easy to say “we told you so”. The important thing now is to learn and act. This pandemic is revealing what’s to come with other systemic risks and we need to work together as an industry and with governments and our customers to ensure the world is more resilient the next time disaster strikes – whatever form it takes.