The insurance industry’s challenges and response to COVID-19

The state of affairs in the insurance industry

According to a recent article by the Norwegian Broadcasting Corporation (NRK), the outbreak of COVID-19 has cost insurance companies in Norway approximately 1 billion Norwegian kroner in less than a year. For instance, Europeiske Reiseforsikring has had 53.000 travel insurance cases with current losses exceeding 420 million Norwegian kroner. Most of these cases were a result of travel cancellations due to the COVID-19 outbreak. Compared to last year, travel insurance related payments of Europeiske Reiseforsikring have increased by 55 %. Another Norwegian insurance company, Fremtind Forsikring, has registered 110 000 cases compared to 86 000 cases last year. While cancellations have increased, losses may to a certain degree be offset by a decrease in other travel insurance claims due to travel restrictions. Consequently, we may not see significant increases in premiums as a result of COVID-19.

Experience with pandemics in most countries is extremely limited and insurance coverage has, in general, not been specifically designed for the resulting costs and losses. Pandemics such as COVID-19 have proven to have global impact, hitting multiple industries, countries and billions of people simultaneously, with potentially devastating consequences. Their impact requires resources that can only be accessed by governments and with measures that require international cross-industry collaboration.  

A new framework approach in sight?

From a global perspective, the insurance industry has responded to customers’ needs in the immediate aftermath of COVID-19 by paying claims, donating funds, and offering flexible terms and conditions. However, the pandemic has exposed the limitations of existing risk transfer structures for systemic risks of this scale. Society has shown needs for solutions that could offer protection in the new risk landscape and, in the short term, from a second wave of the pandemic. Several reports from both public and private organizations, such as OECD and Lloyds, have shed light on the issues the insurance industry faces due to systemic catastrophes, and have provided different suggestions on how the industry should handle the aftermath of COVID-19. The solutions could offer insurance customers greater protection against a future wave of the COVID-19 pandemic or against other future systemic risks.

Today’s situation requires close collaboration between insurers, brokers and customers, and between the global insurance industry and governments, to create new vehicles that combine insurance capital with sovereign capacity to enable protection against systemic risks. To accelerate this process and achieve this goal, Lloyd’s, amongst others, have in their recent report proposed solutions that could provide protection for customers’ short, medium and long-term needs. These include two potential frameworks that, if taken forward, could provide governments around the world with risk transfer models they could put in place immediately in partnership with the insurance industry.

The potential solutions provided by Lloyd include:

• ReStart (pooled insurance capacity to protect customers against a potential second wave of COVID-19).
• Recover Re (a government-backed vehicle offering long term ‘after the event’ cover that could insure against COVID-19 and other eventual future pandemic risks).
• Black Swan Re (a government-backed vehicle to insure against future systemic risks).

The so-called ReStart solution is a potential new insurance Lloyd’s market is developing due to the crisis. It would offer business coverage for future waves of COVID-19 by pooling capacity from several Lloyd’s market participants. It would initially be aimed at smaller businesses, potentially expanding across a broader range of small and medium-sized enterprises and mid-market over time.

The Recover Re-solution is one of two national or regional frameworks that could provide governments around the world with risk transfer models they could implement in collaboration with the insurance industry. This framework is a post-treatment insurance that could provide small and medium size enterprises with a cash injection and recovery support, paid for over the long-term and backed by a government credit risk guarantee.

The second framework, the Black Swan Re, aims to provide reinsurance for commercial non-damage business interruption cover for future systemic risks through industry pooled capital, backed by a government guarantee to pay out if ever the pool had insufficient funds.

The Recover Re and the Black Swan Re structures could also be used in combination. Recover Re could offer immediate positive impacts to a targeted portion of small and medium sized enterprises, whilst Black Swan Re could offer protection against the next crisis to a wider set of businesses, creating greater resilience to future systemic risks.

Closing remarks

To summarize, the COVID-19 outbreak has exposed the world to the weaknesses and limitations of existing risk transfer structures offered by the global insurance industry. Today’s situation requires close collaboration between insurers, brokers and customers, and between the global insurance industry and governments, to create new vehicles that combine insurance capital with sovereign capacity to enable protection against systemic risks. The suggestions from Lloyd display great insights on the systemic risks the insurance industry is currently facing, and which we may face again in the future. The aforementioned suggestions are a result of a study of tendencies during financially challenging times the world has faced throughout the modern ages. As such, both reports from Lloyd and the OECD are and will continue to be applicable, not only in relation to the current Covid-19 pandemic, but for future systemic events as well, for which it may function as a framework approach.

References

1. https://www.nrk.no/norge/prislapp-for-forsikringsselskaper-etter-halvt-ar-med-korona_-1-milliard-kroner-1.15153215, accessed on 18. September 2020.
2. https://www.lloyds.com/~/media/files/news-and-insight/coronavirus-hub/covid-white-paper/lloyds_covid-19_white-paper_final2.pdf, accessed on 17. September 2020.
3. http://www.oecd.org/pensions/Insurance-sector-responses-to-COVID-19-by-governments-supervisors-and-industry.pdf, accessed on 17. September 2020.
4. https://www.finansnorge.no/tema/skadeforsikring/naturskadeforsikring/, accessed on 22. September 2020.