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The effects of this pandemic outbreak on the insurance industry are still to be quantified. There are far too many soldiers still lying on the ground at this stage, but a bit of guess work clearly indicates that there will be more than meets the eye. In this article we will try to foresee and analyse the effects on the insurance industry together as well as identify new opportunities. The latter is no mean feat as the industry approach towards epidemies and pandemics is very broad and varied, ranging from complete exclusion to full cover. The experience with past epidemics has resulted in many policy exclusions relating to disease. Therefore, any conclusions should always keep in mind the specifics of each individual insurance contract.
The claims hitting the insurance industry from the COVID-19 outbreak will be coming across a range of products, namely:
• Health Insurance
• Travel Insurance
• Tour Operator Liability Insurance
• Event Cancellation Insurance
• Business Interruption Insurance (BII)
• Supply Chain Risk Insurance
• Cyber Crime Insurance
• Third Party & Employer’s Liability Insurance
• Income Protection Insurance
• Key Personnel Insurance
• Aviation Insurance
The industry will also probably be hit from indirect losses too, such as from loss of investment returns, from reduced renewal rates to increased overheads.
The Way Forward
The insurance industry must not only think in terms of flattening the curve, but rather of staying ahead of it. It must look ahead and see how insurance will be and be perceived to be in a modified insurance appetite environment. Similar past problems have led to a lot of product innovation, particularly on specific covers for infectious diseases and supply chain risks, although the uptake of these covers was very slow. Possibly, however, the perception in the developed world might still have been that such problems are not that frequent, or that it is only a problem in the poorer countries. This COVID-19 outbreak and, in particular, the extreme social distancing measures taken by many governments will certainly be a wake-up call for many. What was previously considered as a possible 1-in-200-year event might in fact be more frequent than anticipated. The insurance industry therefore has to act and fast. Being one of the best risk-sharing mechanisms, the insurance industry has to be ready with new solutions and also ensure that it remains strong.
The social role of the industry is also now further enshrined under the Demand & Needs requirements within the Insurance Distribution Directive. Therefore, simply excluding infectious diseases is not a possible answer. The need for cover is urgent and insurers have to find the best way to make the cover available in a way which keeps costs reasonable and at the same time does not constitute a threat to their solvency.
In this regard, investing in a new insurance undertaking (which therefore has no claims legacy) becomes very appetising once the crisis is over. We are likely to see start-ups mushrooming in many jurisdictions such as Malta, which is ideal for such operations. Furthermore, with the demand for specific covers for infectious diseases on the rise, these in themselves could present business opportunities.
Needless to point out, any offers for such cover have to be properly managed particularly because of the potentially large losses. This is where reinsurance and potentially Insurance-Linked Securities might come into play. New covers for infectious diseases would require some form of Stop Loss or catastrophe cover. Reinsurance and CAT Bonds would be part of the solutions.
Traditional CAT Bonds, however, follow the insurance loss in the first instance and are therefore indemnity triggered. During epidemic outbreaks, though, certain operations such as healthcare service providers, hospitals, the logistics industry, the hospitality / travel industry and other similar industries might require an immediate cash injection based on a parametric trigger (such as the number of infected persons within a timeframe or number of countries shutting down their borders). The quick settlement would support these industries in dealing with the immediate issues, such as potential cash flow issues related to employee salaries whilst on lockdown, re-routing of passenger repatriations, hosting of non-paying customers at hotels whilst these are blocked in the country, additional re-routing expenses for logistics operators and the potential need for additional resources in certain industries. The fact that there might be demand for all these new forms of exposures, and that the response might be through parametric triggers, could also give a new sense of being to FinTech and in particular Blockchain solutions. Smart contracts are certainly already geared toward such potentially catastrophic situations.
Such parametric CAT Bonds and covers are not new. Following the outbreak of the Ebola virus in Africa, in 2016 the World Bank created the Pandemic Emergency Financing Facility (PEF) which was also backed by reinsurers such as Munich Re and Swiss Re. This Pandemic Bond is aimed at acting as a fast capital injection to tackle emergency responses and assist medical efforts for the spread of certain diseases in West Africa. In such cases, and, as we are learning through this COVID-19 outbreak, time is of the essence. Such products can also be used in combination with more generic fund capitalisation. The diagram below explains how the PEF works in this regard:
Other opportunities might come in the form of offering customers certain cover in relation to outbreak situations. For example the DBS Bank in Singapore, as part of its contribution to society, is offering its customers a free 30-day COVID-19 Hospital Cash policy which gives daily cash benefits (circa Eur 60/day) in the case of hospital confinement, together with a lump sum (circa Eur 600) in the case of ICU confinement. In this case, Chubb is the insurer acting as security on this policy.
Travel policies might start offering cover for expenses incurred as a result of being quarantined whilst abroad, or due to the impossibility of returning to one’s own country. For example, it is estimated that between 400,000 to a million Britons might currently be trapped outside the UK without being able to return home. The expenses such persons may incur might become considerable not only for a potential repatriation, but even simply to survive until the possibility leaving the destination travelled to arises.
Event cancellation covers will, likewise, certainly be under pressure to include infectious diseases and Business Interruption covers. The latter will need to respond to possible prolonged periods of closure not only to cover profits, but also work-from-home expenditure and the salaries of idle employees. Demand for cover for loss of key personnel and the inability to work of other employees is certainly to be on the increase.
The opportunities that such scenarios as the above present are likely to be numerous. Innovative covers, coupled with some out-of-the box thinking, could be the response to trigger the much-needed recovery of the insurance industry once this crisis is over.
Mr Julian Boffa is an Insurance Regulatory Advisor within the Insurance and Pensions team of GANADO Advocates, focusing mainly on re/insurance, corporate governance, compliance and regulatory matters. He regularly advises and assists insurance and reinsurance operations with their licence applications and other ongoing requirements.
This article was published on the Times of Malta on 24th March 2020.