Lessons from a pandemic

CCR Re’s chief business development officer Patrick Delalleau reflects on what the industry has learnt in 2020 and why these lessons are shaping the conversations during this year’s virtual Baden-Baden event.

I have been attending Baden-Baden since 1984 and this year will be the first time I will not be hurrying between the Hote Badischer Hof and the Brenner Hotel, greeting similarly busy partners and fellow competitors along the way.

There is no shortage of topics. The impact of Covid-19 is a clear sign that our industry is at a crossroads.

The final cost of Covid-19 will not be known for several years, with estimates ranging from $30bn to $80bn, and possibly even more.

We are all aware the impact will be fairly significant, but something our resilient industry will be able to overcome.

For our industry to recover properly and healthily, we shall have to draw the right lessons from this crisis or risk another potentially more destructive event, if adequate and preventive measures are not taken.

In that sense, we should not look to the future as “back to normal”.

At the inaugural and hopefully last “E-Baden-Baden”, capacity, partnerships and pricing have been the key topics of discussion. However, we are certainly thinking and exchanging beyond that.

Lesson one

The magnitude of a loss that none of us had modelled or imagined in a full risk disaster scenario has certainly been a discussion point and has been a very important lesson.

We know, by definition, that a pandemic is a global event. To tackle it, there are traditional pandemic life covers for mortality risks. But how could we have figured out sequential lockdowns impacting the vast majority of economies for months on end, including country-specific after-shocks?

This pandemic has had a dramatic impact on the entire global economy. It has affected nearly all lines of insurance, including aviation, event cancellation, credit and bonds, professional liability, warranty and indemnity, business interruption (BI), and not to mention non-damage BI, which came as a surprise.

And due to the lockdown measures, worldwide economic growth forecasts are facing a major setback, only comparable to the impact of WW2 on the global economy.

Both sides of insurers’ balance sheets could be impacted with a loss of approximately $200bn – as predicted by Lloyd’s chief executive John Neal in late March – which none of us had anticipated. Thankfully, the asset side has recovered slightly in the meantime, but for how long?

“Society may need some protections our industry does not have the funds to cover, which means we need to think more about the use of a private / public partnership to address these largely uninsurable risks, including pandemic. We need to face them together.”

 

Lesson two

The second lesson is that we realised our contracts, both in insurance and reinsurance, could have been more carefully worded.

When professionals in our industry carefully examine the wording of their insurance and reinsurance policies and contracts, they come to the conclusion that in many cases there are so-called grey areas allowing for interpretations, discrepancies, conflicts, court cases or arbitration.

It’s a shame if the job has not been done properly by allowing unwarranted expectations, because it certainly was not the intention of our industry to offer free coverage that we, as an industry, do not have the funds to cover.

It’s also a shame if expectations aren’t managed and customers are disappointed, so the industry needs to find a medium to avoid causing further damage to industry’s image and reputation.

What is the next step?

Let us remain relevant and let us not commit ourselves too much. This has to be the basic rule, as we cannot fall foul of deceiving anyone – especially when it comes to systemic risks that reach and surpass what can be considered insurable. Our industry has limited resources and can only offer covers according to these limits and at adequate pricing.

We have to face the fact that the world is becoming increasingly risk averse at a time when risks and exposures are on the rise. We experience this every year with:

• Climate change – for example, wildfires, floods, droughts, hurricanes, typhoons, storms and tornadoes; and
• Man-made events – for example, incidents like Seveso-type casualties, riots and political violence of all kinds spreading around the world, or the dark side of cyber-attacks. This year, we also mourn all the victims of the Beirut blast and the terrible damage to the city.

Given that these threats grow at a faster pace than our global premiums and surplus funds, the “protection gap” is growing whilst it should be shrinking.

We need to make sure, moving forward, that covers we can offer our customers are properly designed.

Named perils would be the obvious answer, with anything not listed being excluded. This may sound strict and tough, but that would be the simplest way of avoiding heavy conflicts, lawsuits, and thus save on claims-handling costs and image deficits.

If this approach appears too drastic and naïve, we should, in my opinion, try to move in that direction.

Of course, in addition to basic perils, the insured / reinsured, depending on their risk-averse attitude or their own resources, may purchase additional named peril covers for a correctly calculated additional price.

Having said this, society may need some protections our industry does not have the funds to cover, which means we need to think more about the use of a private / public partnership to address these largely uninsurable risks, including pandemic. We need to face them together.

Not only do we need to think about providing coverage, but also how to reduce risk by nature and accumulations. This is our ESG responsibility, which is a growing concern that goes hand in hand with the increasing threats facing our world.

I believe that our industry should speak out louder and be more proactive in the forthcoming debates pertaining to the challenges of this world, instead of being passive and summoned by governments to contribute with funds, as is currently the case with Covid-19.

Referring back to the risk disaster scenario, we need to request and get the right price for the volatility that we take on which is something we’ve not been very good at before.

Dealing with volatility has traditionally been our risk and our main “raison d’être”, but we are seeing a growing de-risking attitude from insurance companies, which may be an opportunity for reinsurers or a threat, depending on how we deal with it.