Covid-19: implications for insurer risk management and the insurability of pandemic risk

Abstract

This paper analyzes the insurability of pandemic risk and outlines how underwriting policies and scenario analysis are used to build resilience upfront and plan contingency actions for crisis scenarios. It then summarizes the unique “lessons learned” from the Covid-19 crisis by baselining actual developments against a reasonable, pre-Covid-19 pandemic scenario based on the 2002 SARS epidemic and 1918 Spanish influenza pandemic. Actual developments support the pre-Covid-19 hypothesis that financial market developments dominate claims losses due to the demographics of pandemics and other factors. However, Covid-19 “surprised” relative to the pre-Covid-19 scenario in terms of its impact on the real economy as well as on the property and casualty segment as business interruption property triggers and exclusions are challenged, something that may adversely impact the insurability of pandemics as well as the perception of the industry for some time to come. The unique lessons of Covid-19 reinforce the need for resilience upfront in solvency and liquidity, the need to improve business interruption wordings and re-underwrite the book, and the recognition that business interruption caused by pandemics may not be an insurable risk due to its large accumulation potential and the threat of external moral hazard. These insurability limitations lead to a discussion about the structure and financing of protection against the impact of future pandemics.

Anti-crisis development strategies of insurance companies in Ukraine and Poland in the context of COVID-19

“…It is worth agreeing with Richter and Wilson (2000), who argue that scenarios need to be developed to improve the sustainability of insurance companies. According to Mind, the reliability rating of Ukrainian insurance companies, which is compiled according to the financial statements for the previous year, the first places in the rating are occupied by subsidiaries of international financial groups with German, French and Canadian roots.…”

“…Anti-crisis development strategies will contribute to the sustainability of insurance companies and reduce the negative impact of COVID-19. Richter and Wilson (2000) analyzed the dangers of pandemic risk and described how insurance policies and scenario analysis were used to build resilience to emergencies in a crisis. The authors concluded that, as long-term investors, insurers must advance sustainability through capital adequacy and liquidity, coupled with limiting risk accumulation.…”

“…In this regard, insurers need to improve policies and focus on strengthening harmonization, transparency and compliance. The consequences of the pandemic can have a significant impact on people's lives and well-being, and losses from insurance liabilities will be small compared to those arising with the development of the financial market (Richter & Wilson, 2000). Holliday et al (2020) noted that many examples of innovation have emerged in the insurance market since the beginning of the COVID-19 pandemic.…”

COVID-19 Crisis and Resilience: Challenges for the Insurance Sector

“…As regards the second aspect, the estimate of the expected loss will necessarily have to be revised upwards to take into account the strong correlation of the negative impacts on the economic and financial sectors. Another motivation behind the insurability of the pandemic risk is the issue of potential external moral hazard caused by distorted incentives for public policy decisions (Richter et al, 2020). If there is no room for development for a traditional market for pandemic policies, we think the pandemic risk cannot even be treated in the same way as the catastrophe risk.…”

Pandemic risk: Impact, modeling, and transfer

“…For example, Hartwig et al (2020) built a model to quantify the capital requirement in the context of pandemic insurance, compare the result with natural catastrophe and concluded the private insurance industry does not possess sufficient capital to insure pandemic risk on its own. Richter et al (2020) provide a firm‐level examination of how insurance companies think about pandemic risk prior to COVID‐19, as well as resilience and contingency planning. In summary, both academia and industry have an abundance of reasons to argue that pandemic risk must be treated differently than traditional insurance risks, including natural catastrophes.…”