8 minute read
Double punch
Double punch
Insurance claims and assets are both affected by a pandemic that has led to an economic shutdown and left few areas unscathed
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By Wendy Pugh
Worldwide coronavirus cases are surging past 6 million this month as the insurance industry assesses the fallout and comes to grips with ramifications that will endure well after the outbreak emergency subsides.
Swiss Re Chief Economist Jerome Haegeli says the virus-triggered global recession is like “a car crash without airbags”, and the economic and political implications should not be underestimated.
Lloyd’s notes that it’s the first time in history where an event has impacted both insurance claims and assets. “What makes COVID-19 unique is not just the devastating continuing human and social impact but also the economic shock,” Chief Executive John Neal says.
Underwriting losses covered by the global industry this year as a result of COVID-19 will be about $US107 billion, a Lloyd’s study estimates. That’s similar to the impact of Hurricanes Harvey, Irma and Maria three years ago.
In addition, a $US96 billion fall in investment portfolios is also forecast, bringing total projected losses to $US203 billion.
“Taking all those factors together will challenge the industry as never before, but we will keep focused on supporting our customers and continuing to pay claims over the weeks and months ahead,” Mr Neal says.
The coronavirus pandemic has presented a very different risk to natural catastrophes that cause extensive property damage in defined geographic areas and which are not correlated to the ups and downs of the international economy.
Forced to answer rising criticism of insurance pandemic exclusions, Lloyd’s says the global industry is paying out on a “very wide range” of policies to support businesses and people affected.
Business interruption, travel and trade credit have been among areas to cause angst, leading the industry to point out that covering all risks associated with an event that can impact everywhere at once would bankrupt the sector.
Based on calculations last month, the amount Lloyd’s expects to pay out for covered events is around $US3 billion to $US4.3 billion – similar to the total after the September 11, 2001 US terrorism attacks.
Coronavirus-related event cancellation accounts for about 31% of its likely losses, while 29% is attributed to property classes, 11% to credit lines and some 15 other classes account for the remainder.
In Australia, worst-case scenarios flagged in March as coronavirus case numbers escalated have so far been averted, but economic costs remain high as states cautiously ease restrictions amid fears of a more serious second wave.
The Insurance Council of Australia declared the COVID-19 outbreak a catastrophe on March 11, and established a taskforce to ensure accurate data is captured. But the extent of claims and losses is not yet known.
The Australian Securities and Investments Commission has also said it will be collecting data as it keeps an eye on the industry’s performance, while the Australian Financial Complaints Authority says it has received about 1070 general insurance disputes sparked by the pandemic.
AFCA says some 890 disputes relate to travel, which was one of the first areas to be affected as borders were closed and flights halted. More complaints from other areas such as business interruption are expected.
Listed insurance sector companies faced with high levels of uncertainty have in some cases withdrawn earnings guidance, while providing updates to the Australian Securities Exchange on expected impacts.
Suncorp last month forecast a “modest drag” on gross written premium for this fiscal year due to the take-up of hardship options and lower economic activity, while noting that landlord insurance claims are set to rise with rental defaults.
The insurance investment portfolio recorded a pretax loss of $205 million in the March quarter as volatility affected valuations, with some of that unwound during April.
IAG says investment income on shareholders’ funds amounted to a year-to-date loss of about $280 million pre-tax at the end of April. The insurer has warned of limited scope to pay a final dividend but says its underlying business performance has remained strong.
QBE has highlighted implications for trade credit and lenders mortgage insurance while forecasting a modest GWP impact for this year. In the UK, where it faces potential hospitality sector class actions, reinsurance will limit net business interruption claims costs to $US75 million, it says.
The insurer last month completed a $1.3 billion capital-raising as part of moves to position QBE to withstand future severe economic and investment market downside risks.
S&P Global Ratings says the pandemic has pushed global reinsurers “farther out on thin ice” and has cut its outlook for the sector to negative from stable.
The ratings agency has also noted the “historically unusual” combined asset and liability pandemic impact, forecasting an aggregate combined ratio of 101-105% for the top 20 reinsurers this year, assuming these companies bear around 30% of insured COVID-19 losses.
The main loss burden in the first quarter came from cancellations or postponements for major events, such as the Tokyo Olympics.
Other lines to experience higher losses will include contingent business interruption, where claim levels may depend on legal actions, aviation, credit lines including surety and mortgage, directors’ and officers’, errors and omissions and workers’ compensation, it says.
Virus-related losses are set to keep emerging this quarter while indirect impacts are likely to become apparent further ahead, according to S&P, which expects a global economic contraction of 2.4% this year before a rebound to growth of 5.9% next year.
Swiss Re’s Dr Haegeli says when it comes to the ailing global economy government and central bank actions show “all emergency units are being deployed”.
But he says the international economy was less resilient heading into the pandemic lockdowns compared with the global financial crisis lead-in a decade ago. Therefore he expects a short, sharp recession this time, followed by a protracted recovery.
“The global economy is not a tape recorder,” he told a briefing. “You cannot just do a lockdown and press on pause, or press on stop, and then once you have relaxed lockdown measures you restart. It doesn’t work like that. It is much more complex to restart the economy.”
Still, demand for insurance will not be hit to the same extent as during the global financial crisis and there will be a “less deep” contraction for premiums, Dr Haegeli says.
Australia, which he described before the pandemic as the continuous economic growth gold medallist, is well placed compared to many countries.
Swiss Re forecasts Australia’s real gross domestic product (GDP) will contract 4% this year, before growing 3% next year, inflation will be 0.5% and the 10-year government bond yield will be 1%.
China’s GDP growth is forecast at 3.2% this year, rising to 7% next year, lending support to Australia, while the Eurozone is forecast to contract 7.5% this year and the US economy is set to shrink 6.4%.
The New York-based Insurance Information Institute has emphasised the important role insurance plays in supporting the economy, amid criticism over perceived failings to provide cover for businesses.
“Insurance is a critical part of what’s keeping the American economy going right now,” Chief Executive Sean Kevelighan told a congressional subcommittee.
“Healthcare and first responders, and all essential businesses have insurance backing them in the form of workers’ compensation and commercial auto insurance.
“Restaurants, some of which are staying open for take-out and delivery, are covered for their delivery services as well as other covered events, such as a fire or property damage caused by vandalism.”
Debate is underway internationally on government-supported pools similar to those developed for terrorism or flooding to ensure business interruption insurance can be provided in future events.
The UK Government has also said it will temporarily guarantee trade credit insurance to assist businesses having trouble maintaining cover. The backstop will be delivered through a reinsurance agreement with underwriters to cover firms until the end of the year.
Carolyn Kousky, Executive Director at the Wharton Risk Management and Decision Processes Centre at the University of Pennsylvania, says opportunities to widen pandemic covers could include public backstops and increased use of parametric insurance.
Pandemic bonds issued by the World Bank’s Pandemic Emergency Financial Facility in 2017 could also point the way for improved assistance for lower-income countries.
“We can learn from the experiences of the crisis to design risk-transfer systems that unite private and public sector financing to expand coverage and contribute to broader and more equitable financial recovery from catastrophes,” Dr Kousky says in a World Economic Forum report titled Challenges and Opportunities in the Post COVID-19 World.
Swiss Re’s Dr Haegeli says the pandemic will drive paradigm shifts and accelerate mega-trends that will affect insurance well into the future.
The reinsurer suggests globalisation has peaked, with implications for supply chains and international corporates including insurers, while faster digital transformation will benefit claims-handling and the insurability of risks.
Dr Haegeli says an orderly exit of government intervention as lockdowns end is important in keeping “dynamic capitalism” alive to help drive the economic recovery.
At the same time insurers, at the centre of building and improving resilience through underwriting activities and investment, have a critical role as everyone draws breath and assesses current and future exposures and new ways of doing business.
“I think the pandemic is a wake-up call in terms of risk awareness,” Dr Haegeli says.
