Why the re/insurance industry failed to anticipate COVID-19’s P&C impact

The impact of COVID-19 pandemic looks set to be much more of a P&C shock than a life shock, according to Denis Kessler, chairman and chief executive officer of SCOR.

Speaking at the SIRC 2020 Re-Mind virtual conference, taking place this week in place of the physical 17th Singapore International Reinsurance Conference, which has been rescheduled to November 2021, Kessler highlighted how unexpected this was within the industry.

“One distinct pattern is emerging from the H1 2020 earnings season of the industry: the overall estimated P&C insurance and reinsurance market exposure looks set to be several times greater than the overall estimated exposure for the life insurance and reinsurance market,” he said.

“COVID-19 related charges booked in H1 2020 by insurers and reinsurers globally, which total more than $20 million, are broken down as 90 percent P&C, and 10 percent life. So pure P&C players are faced with a COVID-19 impact whose magnitude is comparable to that of a major natural catastrophe.”

He added that this is the biggest surprise of the crisis because it’s the opposite of what, broadly speaking, had been anticipated and modelled for pandemic risk. While the industry was certainly not unaware of pandemic threat, it failed to accurately anticipate the lines it would impact most severely.

“COVID-19 has demonstrated that most of the industry previously viewed pandemic risk through two prisms,” Kessler said.

“Pandemic had traditionally largely been considered a life catastrophe risk. The modelling approach for this risk had a very strong life focus, with the P&C and macroeconomic components being treated in a more simplified way.

“Many of the pandemic models developed so far by insurers and reinsurers focused on one aspect, namely the distribution of the number of victims. In the vast majority of cases only risk carriers with a significant life book of business had traditionally tried to closely monitor and manage estimated pandemic risk exposure.”

“COVID-19 has demonstrated that most of the industry previously viewed pandemic risk through two prisms.” Denis Kessler, SCOR

Part of the puzzle
He said that “endogenous political interference” is an essential piece of the jigsaw when working to understand the disconnect between what was modelled and what we are seeing in the current COVID-19 context. A notable feature in relation to COVID-19 has been the strong impact of government and central bank decisions on life risk exposures and P&C risk exposures.

“Specific actions adopted by public authorities and central banks globally to prevent the pandemic propagation and to manage the impact of the COVID-19 shock as it has unfolded have profoundly modified the very nature of the risk for reinsurers,” he said.

“In retrospect, most of the insurance and reinsurance market exposures to the COVID-19 pandemic are directly driven, or at least heavily influenced, by endogenous factors.

“Political decisions are very difficult to predict and extremely difficult to model. P&C exposures to COVID-19 are de facto largely driven by the inefficiency—and sometimes the efficiency—of public risk management.

“Credit and surety and property business interruption exposures result to a very large extent from the lockdown orders and the negative economic consequences.”

“The lower the level of preparedness, the greater the need to implement very stringent containment measures.”

Public authority variables
Kessler added that the magnitude of the exposures is driven by a myriad of variables directly controlled by public authorities—for example, the timing in terms of implementing containment measures in which businesses can or cannot continue to operate fully, the timing of relaxation of containment measures, and the extent of intervention measures by governments to dampen the economic impact of the crisis.

“The economic cost of this crisis and in turn the exposure to the P&C market will be much less significant in the best prepared, most responsive countries,” he said.

“The lower the level of preparedness, the greater the need to implement very stringent containment measures—which is a costlier solution in economic terms. The greater the public authority denial regarding the risk posed by the pandemic from the start, the higher the ultimate economic cost.”

Kessler noted that lockdown orders came too late in most countries, which led to longer and more stringent lockdowns—and the poorer the public risk management, the higher the economic losses associated with the handling of the pandemic, and the higher the P&C market exposure to the pandemic event.

“Political decisions have substituted life exposures with P&C exposures,” he said. “Each country has made explicit or implicit trade-offs when deciding the extent to which it should prioritise public health or the economy.

“Many countries have clearly decided to prioritise health above all else; the COVID-19 pandemic shock has shown that the value placed on the absence of suffering, on life, has risen very substantially throughout the world.

“The far-reaching lockdown measures implemented worldwide were largely underappreciated by pandemic models. This is the main reason that predictions of many of those models have turned out to be completely off the mark in the present context.

“As the pandemic is still going on reinsurers need comprehensively to analyse the knowledge gained from the new data points which COVID-19 provides and take this into account for the quantification of future pandemic risk,” he concluded.