The (re)insurance sector is well versed at navigating market-changing events, and is well positioned to address the near and long-term impacts of the Covid-19 pandemic, says David Priebe, chairman of Guy Carpenter.
The global Covid-19 pandemic is, first and foremost, a worldwide human tragedy. As of 3 September, less than nine months since it was initially recognized as a pandemic, Covid-19 has infected more than 26 million people and claimed the lives of over 864,000.1
Even before the emergence of the coronavirus pandemic, the (re) insurance market faced a challenging operating environment. Higher loss costs, worsening loss experience and shifting capital flows led to a tightening market that was evident at January 2020 renewals.
Following Covid-19, governments worldwide were forced to impose unanticipated restrictions in an effort to slow the spread of the virus. And while lockdowns have helped to flatten the curve in many countries, the economic consequences are considerable.
“It will be months, or even years, before claims develop fully”
The financial impact to date suggests a choppy and lengthy recovery; gross domestic product (GDP) is not expected to return to fourth-quarter 2019 levels for at least two years.
(Re)insurance underwriting losses from the pandemic are certain, though how much those losses will eventually amount to remains unclear.
As the first systemic, pathogen-based loss to broadly impact the (re)insurance market, Covid-19 is a complex event, unique for its significant multi-line underwriting loss and its global breadth.
It will be months, or even years, before claims develop fully.
There is substantial variability within and between estimates for Covid-19, ranging from a low-end $30bn to close to $100bn.
Besides underwriting losses, the pandemic is also having an adverse impact on (re)insurers’ assets in the form of lower interest rates, wider credit spreads and equity market volatility. In combination, Covid-19 losses and asset impairments may make it more difficult for (re)insurers to absorb the impact of an active Atlantic hurricane season.
Following second quarter earnings, reported losses and incurred but not reported (IBNR) reserves for Covid-19 reached approximately $25bn. While a handful of early rulings have upheld contractual exclusions for Covid-19 losses, the ultimate outcome will not be better understood for a while.
Losses are emerging from areas such as event cancellation, trade credit, travel, business interruption and accident & health. Business interruption coverage has taken center stage thus far, although pandemicrelated claim trends within liability lines will soon emerge as well. At the same time, other lines of business including personal and commercial auto, are benefiting from an immediate dip in claims due to the lockdowns.
Risk carriers excluded pandemics from all-risk commercial property policies years ago because the price adequacy to achieve an appropriate spread of risk would have precluded most companies from buying it.
As events move from theoretically defined scenarios to real world application, coverage interpretations will become critical and actual coverage gaps may arise. Fundamentally, though, paid losses must follow contract terms in order to maintain a healthy marketplace. Any erosion of contract rights – whether by legislatures or by courts – is bad for the entire economic system.
The reinsurance market is well positioned to support insurers through this period of uncertainty.
The sector’s capital position remains strong and stable (even after the recent market volatility) and reinsurance is one of the most effective tools available to insurers in managing earnings volatility at this time.
Covid-19 does, however, raise serious questions about the insurability of pandemic-related risks, and other similar, systemic (non-physical) risks, going forward. The increasingly complex risk landscape, along with the interconnected global economy, is challenging long-held assumptions around (un)correlated exposures.
We are now living in the age of intangibles, with risks becoming more insidious and pervasive. Today, around 90 percent of the S&P 500’s market capitalization is intangible – whether in the form of data, intellectual property, brand or the like. The sheer scale and indefinite time horizons associated with these types of risks are immense and likely beyond the financial capabilities of the insurance industry for tail events.
Solutions can nevertheless be found if key stakeholders, including governments, policyholders, intermediaries and carriers, come together to develop a plan to implement mitigation strategies and a response mechanism for future pandemic events.
The public-private partnership model is one that has worked particularly well for more established risks capable of causing systemic economic shocks. It is encouraging to see that several groups are working on developing solutions, such as in the United States where the APCIA, Chubb Insurance Group and Representative Carolyn B. Maloney have introduced potential pandemic solutions.
“Covid-19 raise serious questions about the insurability of pandemic-related risks”
Over the coming months these solutions and possibly others will be deeply discussed and debated as we work towards finding a forward-looking solution to pandemic risk. This is a critical issue for our economy and society; which is why Marsh & McLennan and Guy Carpenter have felt it was important to be at the forefront of conversations in creating public sector pandemic risk solutions around the world.
Guy Carpenter has convened a Covid-19 Task Force to help support clients through these extraordinary times, and is fortunate to be able to bring the power of Marsh & McLennan Companies to bear through this process by working closing with Marsh and Oliver Wyman to understand the impact on the primary market and wider financial system.
Liquidity and access to capital will be crucial to ensuring risk carriers can continue to provide cover following market-changing events, and reinsurance will be critical in supporting insurers in these endeavours. The (re)insurance sector is well versed at navigating market-changing events, and is well positioned to help clients address the near- and long-term impacts of the Covid-19 pandemic.