The post-pandemic landscape will be very different..
Work from home; don’t work from home. It’s all over; no, it’s not – a third, fourth, fifth wave is coming. Vaccines fight the variants; vaccines are less effective against variants.
The list could go on. The point is that as we emerge from the worst ravages of the Covid-19 pandemic there is nothing but uncertainty. That uncertainty has huge implications for the insurance market, not least because the post-pandemic landscape is uncharted territory with little data to help understand the new risks. In an increasingly data-driven world underwriters are unnerved when faced with uncertainties they cannot measure, quantify and calibrate against past experience.
Anyone hoping this will be solved by a return to an old normality is going to be disappointed.
There is an ominous medical consensus emerging that says Covid is going to gradually move from being a pandemic to an endemic problem. It will always be with us, occasionally re-asserting itself. That will influence individual and corporate behaviour, fundamentally changing some risks, certainly altering expectations of what insurance should be delivering as a risk transfer mechanism but also as a service proposition when claims need to be made.
The industry already knows it is going to have to re-model business interruption cover. It needs watertight clauses, but it surely cannot afford to walk away from the pandemic risk after all the adverse publicity over BI claims? Will underwriters be bold enough to offer some cover? If so, what will it look like? Will it be enough to convince firms that it is worth buying?
Crucially, can this be done without government standing behind the industry? This is a question that is being asked more and more frequently, especially in the wake of the pandemic.
We have already seen the government step in to sit behind a new scheme for the organisers of major events, such as music festivals. Without a partnership between the events insurance market and the Treasury many more festivals would have gone the way of Glastonbury. With insurers saying the risk of cancellation is now too great – and not known with any measurable certainty – and cover being withdrawn, organisers were left with huge potential exposures that they could not carry themselves.
What insurers fear the most is the aggregation of risk. One or two festivals being cancelled would be manageable, wholesale cancellation of months of events would be crippling. That’s where the government comes in as reinsurer of last resort. It is a safety net for nervous, data deprived underwriters.
It’s not new. It started in the 1980s with long term export credits when the Thatcher government privatised the old Export Credits Guarantees Department. The insurance market was happy to take on the short-term risks but baulked at the huge political risks embedded in the long term risks the government covered. The answer was for the government to agree to be reinsurer of last resort.
In the 1990s, the establishment of Pool Re to take on the terrorism risk for commercial property was another step along the same road. Flood Re in the last decade is another example.
Interestingly, none of these have ever called on the government guarantees. The private sector – despite its fears to the contrary – has always found a way of underwriting the risks once the fear of catastrophic losses has been taken away. Perhaps it shows just what a cautious breed underwriters are.
Now they have got to tiptoe through an unknown landscape strewn with new hazards. Pandemics are by no means the only systemic risk worrying insurers. Others are pressing hard too.
Key among those will be cyber risks, especially as firms establish new working patterns with sensitive data constantly moving between secure office servers and more vulnerable home working set-ups. Before the pandemic, he industry was already starting to air the possibility of creating a Cyber Re in partnership with the government as it shuddered at the lengthening list of liabilities gathering under the umbrella of cyber.
Climate change is another inescapable driver of major systemic risks increasingly beyond the scope of conventional insurance. It also calls into question the relevance of insurance. Just one example illustrates the challenge facing the insurance industry. Insured losses from the recent catastrophic flooding across central Europe are estimated at €4.5bn to €5bn. In Germany alone the economic losses, including reconstruction costs, are put at over €30bn. Put another way, insurance covers only around one-seventh of the total losses.
This will push people into questioning the relevance of insurance in the face of climate change, just as many businesses will be questioning the value of BI cover in the wake of the pandemic.
The answer increasingly lies in building partnerships with the state, taking away from the public purse those risks that can be measured and controlled in a way that does not pose unmanageable financial threats to the viability of insurers.
This needs a new mindset. It needs greater industry collaboration. It needs data to help define the boundaries between private and public sector provision. And it will need new mechanisms to respond to claims where the risk is shared between the insurance industry and the state.