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Pandemic: the black swan risk
Pandemic: the black swan risk
The unfolding, unprecedented story of the COVID-19 outbreak and its impact on insurance so far
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By John Deex
The coronavirus pandemic is moving fast – extremely fast – and what we know now will be quickly overtaken by new threats and new strategies to meet them.
By the time this article is read, the 693,244 cases and 33,106 deaths worldwide will have increased significantly.
The Chinese city of Wuhan, where this all started in December last year, might have returned to normality. Italy may be over the worst, but another country will have taken over as the epicentre of the outbreak.
Many consider this pandemic a “black swan” – a high impact, unforeseen event on a par with 9/11. Others say it should have been entirely predictable, and it must be admitted that insurance policies, at least, were prepared for such an incalculable risk.
What we do know already, and what isn’t going to change, is that it will have an unprecedented and lasting impact – socially, politically and economically.
The economic impact will be worse than 2008’s Global Financial Crisis, and no country or sector will escape unscathed. Australia’s last recession was in 1991, but another looks unavoidable now. General insurance will likely take a significant hit, both financially and reputationally.
Online Insurance News has published more than 80 stories since COVID-19 was identified, covering a huge range of impacts from cancelled local events to global industry trends.
Here is our summary of the most valuable and relevant of that information, in an effort to understand the incomprehensible.
Insurance cover
It seems a long time ago, but at the start of the outbreak Australians were primarily concerned with the impact on their international travel – and how travel insurance would respond.
It quickly became apparent that most insurers have either a blanket pandemic exclusion, or a “known event” exclusion, under which COVID-19 claims were kept to a minimum.
All insurers take a different approach, and so consumers are always advised to “check your policy”; but chances are that cancellation isn’t covered, especially if insurance was purchased after late January.
As travel restrictions tightened, there was a knockon effect on the tourism and hospitality industries. And now that all of Australia is under varying degrees of lockdown, pretty much all businesses are suffering to some extent.
But business interruption policies also have pandemic exclusions.
The Insurance Council of Australia (ICA) says “some specific policies may differ” but the majority are likely to contain exclusions relating to losses caused by diseases notifiable under the Quarantine Act or the Biosecurity Act.
Similar restrictions apply to event cancellation. Sports events, music festivals and industry conferences have all fallen victim to the virus, but most event cancellation policies contain a communicable diseases exclusion.
A French rescue team carries a COVID-19 patient at Strasbourg University Hospital
An extension can be written in, but now the outbreak is a “known event” it is impossible to get cover specifically for COVID-19.
Workers’ compensation claims could increase as a result of the outbreak. If an employee can show that their job significantly contributed to them contracting the virus, then a claim could be made.
And life insurance policies, in the main, will pay out.
The Financial Services Council says that if cover was taken out prior to March 11, and if policyholders followed government travel advice, there are no exclusions that would prevent payment of a coronavirus-related death claim.
However, if arranging new cover customers may be asked about their risk of exposure to COVID-19 and exclusions may be applied.
Impact on insurers
With claims curtailed for the most part, the direct impact on insurers is predicted to be equivalent to a “moderate natural catastrophe”.
ICA declared COVID-19 an official insurance catastrophe but is yet to give any update on claims totals.
However, insurers will not escape unscathed. Their own business continuity problems, plunging investment returns, reduced demand for certain types of cover, and even reputational issues will all play their part.
“The general insurance industry will not be one of the most heavily impacted sectors,” Finity Consulting Principal Estelle Pearson says. “However, the impacts are not necessarily immaterial, and careful thought is required to enable insurers to get a handle on the implications.”
Willis Towers Watson says the main concern for insurers and reinsurers right now “is the reductions in the investment side of the balance sheet”.
The pandemic could wipe $US1.3 trillion from the world economy – 25 times more than the economic loss from the SARS outbreak in 2002/3 – and insurers will need to renew most of their annual insurance and reinsurance contracts while the catastrophe is still ongoing.
Deloitte US insurance leader Gary Shaw says the big-picture concern is how the outbreak might affect the global economy and, in turn, prospects for growth and profitability in insurers’ underwriting and investment portfolios.
“Financially, insurers will likely need to adjust their budgets and implementation plans, cashflow expectations and investment portfolios in light of recent developments,” Mr Shaw says.
Many listed Australian companies, including QBE, Steadfast, AUB Group and Genworth, have withdrawn their earnings guidance.
Almost the entire industry is working from home, which has had some impact on efficiencies no matter how well you’ve prepared, and ICA says disruptions caused by social distancing and shutdown measures are taking their toll.
Repairs following $4.5 billion of summer natural catastrophe losses have become much harder to complete, and the closure of many overseas call centres used by Australian insurers has also created difficulties and delays.
Travel insurers have suspended sales of international travel products due to the Federal Government’s travel ban.
And some insurers have placed an embargo on the sale of landlord insurance policies, or are adjusting what can be covered in future policies.
While insurance is considered an essential service, and will remain functional, nobody is trying to claim that it will be “business as usual”. Far from it.
Impact on brokers
The next few months will also be very challenging for brokers as fears grow for the SME sector.
Brokers say they expect some COVID-19 impact, through reduced demand for their services or an inability to actively engage with clients.
“There are going to be clients who may, unfortunately, lose their businesses,” says Dianne Phelan, Group Operations Manager with BJS Insurance Group and Vice-President of the National Insurance Brokers Association (NIBA).
“Any reduction in insurance needs is going to have an impact on revenues. So yes, I think brokers themselves need to be engaging their risk management plans that they will have or should now have in place for this eventuality.”
About 29% of businesses surveyed by SME-focused consultancy Cameron Research say the virus outbreak has already had a significant impact on their operations and more than 50% predict problems over the next three months.
There is also a growing awareness that the actions of insurers to either extend concessions to customers, or to limit their exposures, can expose brokers to loss of income.
For example, IAG’s announcement in late March of a range of concessions (see further down this article) included a decision to allow small businesses experiencing financial hardship to defer premium payments for up to six months.
The move has upset brokers, who say they weren’t consulted by IAG prior to the announcement. They say the move will impact on their own revenue – in some cases severely – and that brokers dealing in the SME market are, for the most part, themselves SME businesses.
And the Government’s imposition of strict rules on March 29 limiting meetings to two people, enforcing a 1.5 metre separation distance and defining “non-essential meetings” all but eliminates brokers’ ability to hold face-to-face meetings with their clients.
“That has challenges in terms of being able to work effectively and efficiently,” NIBA Chief Executive Dallas Booth says. “Brokers’ primary role is to service and help their clients and we’re already seeing very significant disruptions to small businesses.”
Reputational risk
While the general insurance industry may be protected from large numbers of insurance claims, it remains vulnerable to attacks on its reputation.
Pandemic exclusions are there for good reason, but some consumers and commentators interpret them as the industry squirming out of its responsibilities when the world most needs its help.
ICA Head of Risk and Operations Karl Sullivan says insurers exclude items for two reasons: either because they don’t understand the exposure, or because they do understand it and it is beyond their appetite.
“We are dealing with the latter here,” he tells Insurance News. “We are talking about tens of billions of dollars in losses. When you look at the record amounts of stimulus being put in by the Government, you get a feel for how big losses could be.”
Mr Sullivan says reinsurers introduced exclusions following modelling developed after the SARS outbreak, and this filtered through to insurers.
“It’s a very large uninsurable risk,” he says.
In the first days of the crisis travel insurance was high on the public’s agenda. While some insurers have since moved to calm the issue by refunding premiums on unused travel policies, the barrage of criticism was intense.
John Durie, a leading business columnist at The Australian, said “a reasonable person may assume that, having taken the prudent step of taking out travel insurance on the advice of your agent, if the host government had put up the shutters because of an out-of-control virus then you would get coverage”.
“Some sections of the travel insurance industry are providing a textbook lesson in why they should be avoided at all costs in the future”.
Finity’s Ms Pearson says “community standards” must be considered, and researchers warned that travel insurance risks being labelled “junk insurance”.
Political pressure
The banking sector was swift in announcing industry-wide measures to ease customers’ financial burdens, which resulted in the insurance industry coming under considerable pressure from the Federal Government to join in.
The rationale behind the Government’s push for insurance to do the same as the banks was logical enough.
It was devising a series of extensive measures to help Australian businesses and workers, and wanted the financial services sector to step up.
But the dynamics of insurance are very different from the banks. While the banks have been prepared to make a range of concessions to customers, the actual financial losses they experience as a result are not that significant. And the major “four pillars” banks, in particular, are enormous retail-oriented operations that hold around 80% of the nation’s banking assets. Four of the top six companies on the ASX200 are banks. The concessions will not hurt them for long – if at all.
Compare that with general insurance. In the case of travel insurance, for example, insurers couldn’t waive pandemic exclusions and pay all claims, because to do so would have reinsurance repercussions and wipe out a whole year’s business. Doing the same for business interruption would be even more crippling.
But that is not to suggest the insurance industry isn’t willing to do all it can to help customers maintain the security of their businesses and homes.
Finding ways to help
Through March and early April the Insurance Council of Australia (ICA) worked with its member companies to devise an industry-wide set of measures to help consumers.
That’s not as easy as it may seem. ICA’s 56 member companies form an unwieldy mix of local and international companies, each with their own way of working and unique approval channels, some of which are very long.
While the members reached broad agreement by the end of March that unused travel premiums should be refunded, and there was also consensus on a range of other measures to help small business clients survive and keep their cover in place, getting final sign-off on an industry-wide announcement proved tricky.
ICA’s Mr Sullivan says an industry-wide position is still “a work in progress”, but that a number of measures have been agreed and members are free to implement them as they see fit.
“It has been incredibly complex,” he says. “We have gone to great lengths with the Government to explain that we are not the banking sector.
“Saying that a customer doesn’t need to pay a premium for six months sounds easy, but it isn’t.
“With travel insurance, if you are a monoline travel insurer that works through agents it can become very complicated to refund those premiums.”
Insurance News understands that some insurers also held concerns that reaching agreement on an industry-wide agreement could be considered anti-competitive conduct, so any announcement would have to wait while Australian Competition and Consumer Commission (ACCC) approval was sought.
But Mr Sullivan says the ACCC – which had already indicated its willingness to be flexible in such matters – was not the real hurdle.
“It’s more about the number of players involved and the variety of processes,” he says. “It has not been possible to announce an industry-wide position yet, but we have put together a package and those measures are sitting there for insurers to use.”
IAG, blessed by short managerial reporting lines and impatient to get its own initiatives out into the market, pushed ahead and unilaterally announced its own measures.
They are:
• Travel insurance refunds for any unused proportion of premiums
• Deferred premium payments for up to six months for small businesses experiencing financial hardship
• Refunds on the unused portion of premiums for small businesses who cancel their insurance, with no administration or cancellation fees
• Small businesses which need to close premises due to the impact of COVID-19 can maintain full insurance cover on the premises with no changes to premium
• Reduced timeframes in making payments to suppliers from 30 to no more than 15 business days.
IAG enjoyed media praise for its actions, which stung other insurers who are working to present a unified front. IAG’s measures are also thought to reflect those on the verge of being agreed by the wider industry – including rival insurers Suncorp and QBE.
It’s all a bit messy.
The Insurance Council of New Zealand has taken a different approach. Rather than trying to secure agreement on industry-wide measures, it has published 10 principles to guide insurer responses, leaving the responses themselves to the individual companies.
Thoughts have already started to turn to how this could be done better next time, and whether the insurance industry should or could be offering more protection.
“This is a once-in-a-100-year-type event,” Prime Minister Scott Morrison said on March 17, adding, “we haven’t seen this sort of thing in Australia since the end of the First World War.”
And while there will always be ways to learn from this event, in the same way as war is excluded, recovery from such pandemics may need to remain primarily an issue for governments, not insurers. 0
