Covid’s Risk Premium. Policies For An Uninsurable Pandemic

Before Covid-19 gripped the world in a pandemic, myriad forecasts were made about the transfer of risk from the public to the private sector. With rising populations, governments would rely increasingly on private investors and corporates to fund spiralling social, environmental and infrastructure costs. Public-private partnerships would share more risks in health, education and transport. Governments could no longer be relied upon to take the lion’s share of global risks.

How the world has changed. US banks took total provisions of $115bn in the first half of this year. In Europe, calculates the Financial Times, Covid-19 is showing the financial sector to be “both morbidly obese and dangerously addicted to prescription drugs,” rendering many banks “uninvestable”. Meanwhile, Lloyds’s of London believes Covid-19 will become the biggest-ever insured loss, with $100bn of non-life payouts surpassing Hurricane Katrina’s $50bn in 2005.

One might expect Covid business interruption, event cancellation and travel disruption claims to be killing insurers, but it’s not happening yet. The Lloyd’s forecast loss isn’t even as high as the $144bn paid out in 2017 for multiple hurricanes, wildfires, landslides and floods. “Most insurers learned the lessons from the SARS outbreak of 2003,” says Laura Hay, global head of insurance at KPMG International, who expects the impact on general insurers to be “relatively manageable”. Exclusion clauses for pandemics have long been inserted into most non-life insurance policies. Without such exclusions, Carolyn Kousky, executive director of the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, calculates that the potential cost of just one month of US insurers’ business interruption losses during this pandemic would be ten times the usual annual total. Hay sees hazards ahead for the $11bn trade credit insurance market and workers’ compensation claims against employers but still expects “positive” consequences for some underwriters, with rising sales of health, critical illness and life cover.

What does this mean for business risk and those who shoulder it? Nick Martin, a fund manager at Polar Capital Global Insurance Fund, reports that premiums are now “accelerating virtually anywhere we care to look,” with underwriters being “paid more appropriately for the risks they take on”. Swiss Re believes this will be most accented in China, predicting premium growth of 7% this year and next. Individual sector rises will be much sharper. Broker Gallagher says directors’ and officers’ liability premiums for public companies judged to be particularly exposed to Covid legal claims have risen by 2,000% this year. Fellow broker Marsh says overall global commercial insurance rates rose by 19% in the second quarter. In major event cancellation cover, Steven Howell, of Media Insurance Brokers, says Covid-related claims will continue to be excluded but a lack of capacity is still driving premiums higher. “Lots of underwriters have quit,” he says, predicting that those remaining will hike rates.

How can such transferred risks be best managed and reduced? Consultants EY say Covid’s rapid spread has forced companies to truncate the usual four stages of prevention, detection, response and mitigation in a risk management life cycle. But the crisis is also still at an early stage and six steps are recommended: setting up a crisis management taskforce, identifying risk exposure, prioritising risks, taking mitigation measures, monitoring and evaluating their impact and building resilience. On a more granular level, insurance brokers Aon suggest reviewing policy coverage, testing business continuity plans, mapping supply chain implications and understanding the triggers for different risk levels within organisations.

All this is much easier said than done. What Covid means in the longer-term for global risk transfer patterns is less clear. Kousky says that one already identifiable trend is that public sector risk transfer to the private sector is playing a limited role in the pandemic, as insurers’ exclusions and the high cost of expensive disaster insurance policies deter buyers. She believes it is time to rethink risk transfer amid heightened expectations of global catastrophes, with increased government backstops being put in place in developed nations, alongside rising demand for sovereign-level insurance in lower-income countries. “A global economic shutdown triggered by a worldwide pandemic is so far to the extreme that the full range of losses is essentially uninsurable,” she says. “This is where the public sector in richer nations must step in to reduce the economic pain and speed recovery.”

The question is when, rather than whether, the long-term trend of risk transfer to the private sector will resume.  Once Covid is under control, the Institute for Government says “wartime” approaches will become less appropriate. Risk transfer is also too pivotal to the global economy to be nationalised for long. As former Lloyd’s chief executive Inga Beale says: “What insurance stands for is enabling the world to move ahead. Fundamentally, it underwrites human progress.”

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