Virus spreads in such a short period to impact global economy
Coronavirus-19 started to be perceived by public opinions in January 2020 when the city of Wuhan China was locked down on January 23, 2020 for more than two months.
Since then, the virus has been detected in more and more countries worldwide, people infected with various syndromes and specially a high death rate in elderly people at the beginning of diffusion. Countries in Asia, Europe and America began to ban lockdown rules one after the other from February and onwards.
The first impact resides on livelihood related business, such as retail, restaurants whilst shopping centers closed immediately which caused a loss of income during this period.
The border within EU countries as well as with other Non-EU countries also closed for more than two months due to the rapidly virus spread which resulted in a strong effect to the air and marine transportation business. For example, a big airlines group reported recently a € 815 million first-quarter operating loss and so many air companies called for government financial support for next few months.
Furthermore, industrial, manufacturing, all kinds of micro-, small and medium sized enterprises have been heavily affected by COVID-19, the current and potential economic loss being greater than the economic impact of the global financial crisis in 2008.
A new catastrophe makes a huge loss in the (Re)insurance Market
We know today COVID-19 conveys a high impact to all business worldwide, insurers in different countries face to rising claims and reinsurers are preparing to face a potential request of recoveries.
While the lockdown has been progressively lifted in more and more countries since June, several cities or regions are back to the 2nd lockdown due to the increasing numbers of infections. Thus influence of COVID-19 on global economy could be felt until next year.
As well as many analysis reports mentioned, several lines of business reach their dramatic situation such as in Aviation where airline companies ground the majority of their fleets, many of them requiring state support.
Policies cover event cancellations worldwide are also supposed to be triggered, fortunately the worst has been avoided for insurers since the Olympic Games in summer 2020 in Japan have only been postponed rather than cancelled. Personal Accident (PA) and Travel policies are covering the cost for repatriation of stranded individuals, trips cancellations or individuals falling ill of infected by COVID-19 during their travel abroad.
Marine Cargo is susceptible to extensive business interruption (BI), delay in good delivery, and spoilage or contamination claims. However certain lines, such as personal and commercial automobile have benefited from an immediate reduction in claims due to the lockdowns and providing positive offsets. Employers Liability is also expected to face only limited impact.
According to Lloyd’s estimation in its recent economic study in May*, COVID-19 underwriting losses for (re)insurance industry would reach approximately $ 107 billion (majorly 31% event cancellation, 29% property losses and 11% as credit losses) which is becoming one of the biggest loss years in history. For the whole 2020, the point of view from an investment bank is relatively conservative, COVID-19 underwriting losses for global (re)insurance markets could reach $ 50 to $ 70 billion.
A London based reinsurance broker analyzed this event loss range of general insurance from $ 32 to $ 80 billion across key classes in the U.S.A and in the U.K, including the London Market.
Another market leading broker has a large view of the loss in their June published report, which is estimating that catastrophe losses that have already occurred year-to-date, along with the catastrophe claims that are typical in the second half of the year, could both lead to total losses for fiscal year 2020 that are likely to approach at least $ 100 billion to $ 160 billion (estimated $ 40-100 billion related to COVID-19).
Compared to a natural catastrophe or the financial crisis impact in 2008, COVID-19 claims lie in a very high uncertainty situation regarding the ultimate total loss which will be driven by various unquantifiable factors which include each country’s lockdown duration, the potential impact of a second wave of infections which could mean an extension or re-introduction of lockdowns, and unknowns regarding BI claims and contracts.
Until now, even if the current loss estimation is large and similar to those of a medium-to-large natural catastrophe, we still believe they are manageable by (re)insurers.
(Re)insurance solutions to support companies in the future epidemic
In general, (re)insurers receive premium to provide a protection of (re)insured following the contracts, especially all of the clauses agreed and signed. However, it is worth noting that two months after the lockdown in France, the Commercial Court of Paris ordered urgently a leading French insurer to pay a restaurant owner two and half months’ worth of coronavirus-related revenue losses.
The court said the administrative decision to close the restaurant qualified for insurance cover as a BI loss. The insurer disputed this interim decision and argued its policy did not cover business breaking off caused by the health crisis. Thus the insurer had been seeking an amicable solution with the insured as the original contract might contain some ambiguity.
This first juridical case could be of interest to various commercial (restaurant, café…) in many countries which also has intentions threatening legal action against insurers who are not going to pay out on BI policies.
Therefore the clarification of the clauses in the contracts is necessary, such as in U.K., the financial regulator has also turned to the courts to try to gain clarity on whether insurers should pay out coronavirus-related claims to small businesses. One rating agency analyst stated that if all COVID-19 related losses were deemed covered by insurance, French insurers would have to compensate € 20 billion per month, industry estimates show.
No matter the outcome in this French insurer’s court case, prolonged legal wrangling might prompt the French insurance regulator to insist insurers put aside additional reserves to offset legal risk, which would impact insurers’ profitability this year.
COVID-19 is a lesson for (re)insurers to remind the importance of insurance provision for epidemic. In order to keep a long-term stability of our economic and social environment against any future similar event, the policymakers should develop solutions particularly in the context of public-private partnership.
According to a recent OECD analysis report, the government and regulators are working on the protection gap for BI losses resulting from pandemics and infectious disease outbreaks, certain studies are ongoing in the U.K., the U.S.A. and in France.
In April, a protection project was quickly being proposed to support the insurers in France by French Insurance Federation (FFA) in consultation with French Ministry of Economy and Finance. As the existing French natural catastrophe (Nat Cat) scheme, the "exceptional disaster" (CATEX-catastrophes exceptionnelles in French) system proposed by insurers would setup to be a simple, quick and structured on a lump sum basis to help insured companies to make it through cessations or significant reductions in activity associated with an exceptional event such as a pandemic, the aftermath of a terrorist attack, riots or a natural disaster. It could be triggered following a declaration by the State of administrative closure affecting a number of companies for a specific period and geographic area.
The FFA draws a blue plan for all very-small-enterprises (VSEs) and small-medium-enterprises (SMEs), about 2.9 million in total affected by such closure would be eligible for this scheme. It would be included either in policies that include "Fire" cover, as all of VSEs and SMEs currently benefit from this cover in their contract, or in policies that include BI cover, and around 50% of the companies have it currently in the contract. The procedure of indemnity payment is simplified to the insured and excluding payroll and profit at pro rata of the closure period.
The first estimation of FFA is that insurers and reinsurers could provide € 2 billion of annual indemnity capacity to such insurance cover. Beyond this limit, a public reinsurance with the French State Guaranty through the French reinsurer CCR would be necessary. As highlighted in the 2019 ESG-Climate report by CCR Group top management, the implementation of this public reinsurance scheme for the risks associated with insurance/credit activities in order to support the activity of VSEs and SMEs located on French territory is part of social dimension of ESG (environmental, social and governance) criteria.
On the basis on these preliminary works, French Government is in the process of launching a wide consultation process among all stakeholders that should lead to a proposed scheme by the end of the year.
Are (Re)insurers ready to face a new sort of catastrophe in the future?
Some markets, e.g. China learned the lessons from the SARS outbreak of 2003 as well as MERS of 2012 then started to introduce communicable diseases exclusion clauses into most non-life products such as Property (BI) and travel insurance. Policies that cover BI usually pay out only if physical damage occurs to insured's assets or operations. Then based on the contract wording, it will be covered for a coronavirus related claims if there is a clearly definition.
An example in Malaysian market, “Infectious or Contagious Disease extension under a Fire Consequential Loss policy shall be strictly in accordance with the Revised Fire Tariff (RFT)/Persatuan Insurans Am Malaysia (PIAM) Guidelines, where the liability limit shall not exceed 10% of Sum Insured or 10 million MYR, whichever is lower, and the time excess is at 72 hours or longer.”
About travel insurance, it may offer cover if an insured is diagnosed with the virus before or during the trip but not for travel cancellation due to pandemic.
The April 1st renewal has been done during the lockdown of COVID-19, then the July 1st renewal just passed away, the market is still in face to the uncertainty of COVID-19 loss due to the continuity of virus infection in the world. Hence (re)insurers remain under the pressure to modify or complete the former contract adapting the current pandemic situation until the next renewal. The London market has created new clauses to this effect for different lines of business such as LMA5394 for property treaty, LMA5395 for Marine…etc.
The approach of applying either the Lloyd’s clauses or others is depending on the requirements of different market. In fact, the intention to include these clauses is to avoid any unexpected interpretation post-renewal as well as a desire to limit the costs of litigation that may result. Some markets before were favorable to apply a sub-limit or an event limit to the infectious disease event but as this time of the year and under the pressure of reinsurers who have a preference to keep a stable period in the financial plan regarding COVID-19, the exclusion clauses remain an open question and obviously the discussion of adding these clauses will be quite of a topic in 2021 January 1st renewal worldwide.
COVID-19 is not yet to be end, meanwhile (re)insurers are still exposed to natural perils of flood, typhoons…in the second semester. Regional conflicts continues in the Middle East, in Africa and in Asia such as the US-China trade war, South and East China Sea sovereignty declaration…etc. Each single event might become another catastrophe likely to impact the economy and then the (re)insurance market.
Apart of natural and man-made risks, the (re)insurers are also facing to other potential risks like in agriculture, locust damage in the western Indian Ocean countries, new strain of H1N1 swine flu virus is spreading in Chinese pig farms, warning of bubonic plague in Inner Mongolia recently…etc.
With COVID-19 experience, we believe (re)insurers are doing their best to overcome it, the (re) insurance world will be able to draw the conclusions of the COVID-19 not only at the contractual level (clarification of clauses, exclusions, time clauses…) but also more broadly at its operation level (capital reserve, budget…). Then the next step could be a simple question, "in a closed collaboration with public authorities, will we be able to reinvent solutions again to reassure the uninsurable?"
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