How the coronavirus crisis is changing the insurance industry

The COVID-19 pandemic, an unprecedented event in modern history, continues to leave its mark on societies and economies around the world. We have learned many lessons so far, the most poignant one being that we weren’t prepared for this.

The impact on the global economy has been devastating. The International Monetary Fund (IMF) says the global economy will shrink by 3%, the worst decline since the Great Depression of the 1930s. Many advanced economies, including the US, UK, Canada, France, and Germany are expected to enter a recession this year.

The Dow and FTSE have suffered their worst quarterly drop since 1987. Oil prices have crashed as lockdowns have brought commuting and traveling to a standstill. In the U.S., the price of West Texas Intermediate (WTI) dropped below zero for the first time in history.

Amid the outbreak, businesses are trying to stay afloat, scaling down operations or shutting down altogether. The insurance industry, which supports businesses through crises and disasters, is one of the sectors at the forefront during this challenging time. And like everyone else, insurance companies are drawing lessons from the pandemic and learning to adapt.

Insuring against a pandemic is hard but not impossible

Pandemics like the coronavirus outbreak are inherently different from other natural disasters. While catastrophes such as hurricanes, earthquakes, and floods hit a specific region, pandemics have no geographical bounds. The timeframe of pandemics of highly contagious diseases such as COVID-19 is virtually unpredictable.

All this makes it harder for insurers to assess and accurately model the risks.

Like any other industry, the insurance sector has finite resources at its disposal. If a disaster hits everywhere simultaneously and for an indefinite period of time, it inevitably puts a lot of strain on insurers. According to the Association of British Insurers, insurance firms have been managing an unprecedented level of activity in response to COVID-19 with some companies reporting a 200% rise in call volumes into their call centers. At the same time, a pandemic inevitably leads to operational challenges for all.

Many insurance underwriters do provide pandemic coverage, and some companies have had the foresight to buy a specific pandemic insurance policy. One example is the Wimbledon tennis tournament, which has paid $31.7 million for pandemic insurance premiums since the SARS outbreak in 2003. The company will reportedly receive $142 million from its insurers for this year’s canceled tournament.

But, generally speaking, the uptake of pandemic insurance has been very low, partly because customers viewed the premiums as expensive and the risk distant. In general, businesses purchase interruption insurance policies that exclude pandemic coverage as standard and only cover physical damage on-premises.

With so few businesses having policies that provide coverage against the coronavirus pandemic, insurers have not been able to build up reserves to pay claims in this area.

But given the current circumstances, insurance companies have joined in the collective response to help support the economy. The estimated 2020 underwriting losses covered by the industry as a result of COVID-19 are approximately $107 billion. The industry is also expected to be dealing with a massive $96 billion fall in portfolio investments.

“It is a human and economic catastrophe that presents complex short, medium and long-term challenges requiring government and industry to join efforts to support all of those businesses and people who have been hardest hit,” John Neal, Lloyd’s CEO, said in Lloyd’s latest statement.

During the pandemic, Lloyd’s has been paying out roughly £500 million in claims every week. Lloyd’s recently announced it expects to pay up to£3.75 billion (approx. $4.3 billion) to global customers total as the lockdown continues and the market responds to COVID-19 claims across a wide range of losses, from event cancellation to D&O.

“Our immediate focus is supporting our customers in their time of need through the crisis, including ensuring the prompt payment of all valid claims,” Neal said.

Lloyd’s also announced its intention to donate £15m to charity partners leading the response to COVID-19, focusing on initiatives around healthcare, innovation, and wellbeing in the UK and other major markets including the US.

Looking toward the future

The COVID-19 pandemic has exposed the vulnerability of businesses. With viral outbreaks becoming more frequent, the market for pandemic insurance is likely to grow.

But given the unprecedented scale of impact that the COVID-19 pandemic has caused, it’s not clear whether pandemics can or should be covered through an insurance model. Many experts are stressing that state involvement in such situations is inevitable.

What is clear, however, is that businesses can do much to protect their operations against the outbreak of viral diseases. Organizations are fast adopting technologies that can enable them to continue their operations while remaining compliant with social distancing rules. Many companies are transitioning to cloud servers and applications that allow their employees to work from home instead of congregating in offices. Video conferencing and online collaboration apps are replacing in-person meetings. Online shopping is replacing physical retail. Social media live streams are becoming an alternative for concert and conference venues.

The experience we gain from adapting to the COVID-19 lockdown will play a key role in shaping pandemic insurance policies. In the future, insurance brokers will be able to coach businesses in adopting the right measures to continue operating in times of pandemic quarantines and reduce their risks.

Lloyd’s is funding £15m in seed capital to explore the medium- and long-term solutions that the industry could put in place. “We are repurposing some existing initiatives to help fast-track the development of innovative new products and solutions to help with economic recovery and resilience,” Neal said.

The Product Innovation Facility, Lloyd’s initiative to innovate and experiment with new ideas in insurance policies, will allocate its resources to pandemic response. The company will also focus the next cohort of Lloyd’s Lab, its insurtech startup incubator, on leveraging new technologies to help deal with widespread business interruptions. Lloyd’s is also working with governments and regulators in different jurisdictions to consider long-term structures that could be put in place to build resilience against global economic shocks.

“We will focus on how we can support the recovery and future resilience of our customers and more broadly the global economy, in the face of further waves of COVID-19 in the medium term, and future global catastrophic events in the long term,” Neal said.