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COVID-19, climate and a changing world. A catastrophe or an opportunity for insurers?

Mike Grant, Sarah Irwin and Eleanor Berkley examine the likely impact of COVID-19 on the insurance industry.

Although the effect of climate change has featured less prominently in the news in recent times, its impact continues unabated. Indeed, further evidence of the relationship between this phenomenon and the current COVID-19 pandemic and future similar outbreaks is emerging. Scientists warn of devastating consequences arising from these twin and inter-related threats.

As global risk increases, the issues faced by insurers increase in complexity and range, and the speed at which the risk is escalating exacerbates the problem. Is this really such a big deal, what is the evidence, and what could it mean for the insurance market and consumers?

The figures related to global warming-related events paint a worrying picture. Extreme weather events are becoming increasingly frequent, with flooding responsible for the greatest economic impact in 2019 according to Aon, with an estimated cost of $82 billion worldwide. The global figure for insured losses from catastrophic events totalled $85 billion in 2019, despite the absence of a true mega-disaster.

Insurers also felt the impact of major weather events in 2018, when the severe cold weather at the start of the year triggered pay-outs of £194 million in just three months for burst pipe damage. The early freeze gave way to a heatwave which in turn resulted in more than £64 million claimed in subsidence damage to more than 10,000 households. The U.S. also experienced its own challenges, with hurricanes Florence and Michael reported to have led to insured losses of over $10 billion. In fact, according to Munich Re, 2017-18 saw natural catastrophe-related insured losses of $225 billion across the two years – the worst two-year period on record.

It is unsurprising that these seemingly ever-increasing pay-outs have led to increased premiums. According to international broker Marsh, global commercial premiums saw the sharpest increase on record in the second quarter of 2019, rising by six per cent from the first quarter. Dramatic rises to reinsurance rates of 30–70 per cent have been predicted by ratings agency S&P Global in California in response to the devastating wildfires.
Governments have taken a variety of measures in their attempts to respond to rising premiums. In 2016, the UK Government attempted to address the rising cost of home insurance for buyers who live in flood-prone areas. The ‘Flood Re’ scheme seeks to mitigate the cost of home insurance in high-risk areas by levying a top-up of approximately £10 per year on all home insurance policies, to subsidise the higher cost of cover in flood-prone areas.

Despite these alarming figures, some commentators and forecasters have found cause for optimism, with some noting opportunities that climate change presents for reinsurers.

However insurers approach the issues, regulators will be keen to restrict price increases, and insurers will have to consider other options such as providing more restrictive cover, laying off greater risk to reinsurers, or perhaps even withdrawing from certain sectors altogether.

How does this compare with the fall-out from pandemic-related events?

Outbreaks of disease have increased over the last three decades, with over 44 million cases globally from 1980 to 2013, and this trend is not expected to come to an end soon.
The economic consequences of pandemics, and the efforts to prevent them, are also clear to see, with the Commission on a Global Health Risk Framework for the Future estimating the annual cost of flu pandemics alone already to be close to $60 billion. Economists have predicted that in the coming decades, annual economic losses attributable to pandemics will rival the losses caused by climate change and will represent 0.7% of global GDP.

It has been claimed that the COVID-19 outbreak had zoonotic origins, i.e. that the virus was transmitted to humans from animals, in particular via wildlife markets. Indeed, it would not be the first time that infectious diseases had been linked to animal populations, with SARS, ebola, bovine tuberculosis, and rabies all having been linked directly or indirectly to wildlife. The COVID-19 pandemic prompted Lion Coalition, a group of over 200 global wildlife organisations, to write an open letter to the World Health Organisation, in which they suggest that zoonotic diseases “are responsible for over two billion cases of human illness and over two million human deaths each year”.

Scientists from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) put forward lower estimates - but repeat the same key concerns, and have warned that “although animal-to-human diseases already cause an estimated 700,000 deaths each year, the potential for future pandemics is vast.”

In a recent guest article for the IPBES, Professors Josef Settele, Sandra Diaz and Eduardo Brondizio and Dr Peter Daszak drew a clear connection between global warming and pandemic outbreaks, commenting that “rampant deforestation, uncontrolled expansion of agriculture, intensive farming, mining and infrastructure development, as well as the exploitation of wild species have created a ‘perfect storm’ for the spillover of diseases.” Many other researchers also draw this direct connection between human health and the wellbeing of the natural world. New diseases are most likely to come from animals and get passed to humans in circumstances where animals’ natural habitats have been disturbed or have disappeared. In some areas of the world the monitoring of human and wildlife health is undertaken hand-in hand, in order to identify outbreaks of such diseases, and their causes.

As has been evident in the timeline of COVID-19, factors of modern life such as growing urban populations and inter-continental travel mean that diseases of this kind are spreading throughout countries and across borders faster than ever. Indeed, in recent weeks 17 million mink have been culled in Denmark due to concerns about possible transmission of coronavirus from humans to mink and back again, in a mutated (and potentially vaccine-resistant) strain.

What is being done?

The emergence of COVID-19 across the globe, and the associated government restrictions, mean that insurers are now facing one of the most expensive events in their history. Lloyd’s of London have estimated that the cost of pay-outs, including business interruption claims, could amount to $100 billion.

The anticipated economic impact has triggered responses across the world to ensure that the insurance industry is better equipped to respond to future pandemic events.

In the UK, the Pandemic Re steering group has been established, headed by Stephen Catlin and with members including Aviva, RSA and Aon, to improve the industry response to the current and future pandemics. Pandemic Re is consulting with Pool Re, the government-backed scheme for terrorism-related losses (set up in the 90s in response to the IRA bombing campaign), and the possibility of similar government backing for pandemic losses will be under discussion.

In the US, the Chairwoman of the House Financial Services Committee, Congresswoman Maxine Waters, has called for “a reinsurance programme similar to the Terrorism Risk Insurance Act [passed in the wake of 9/11] to cover pandemics, by capping the total losses that insurance companies would face”. A draft bill has been introduced by New York Congresswoman Carolyn Maloney which would follow the TRIA model and create a programme whereby insurers would be reimbursed by the federal purse for some of their losses.

In France, each insurance premium includes a small levy towards a natural catastrophe insurance scheme. In the event of a natural disaster, insurers pay out first, up to a total loss of around €4.5 billion, and the state then follows.

Will the risk of future pandemics, or the continued effects of climate change, lead to further increases in premiums?

Munich Re’s chief climatologist has warned that increased risks of natural events will lead to a rise in premiums, commenting that “affordability is so critical [because] some people on low and average incomes in some regions will no longer be able to buy insurance.” With the mitigation and distribution of risk and liability by effective and affordable insurance so fundamentally important to economic operations and our modern way of life more generally, unaffordability clearly has the potential to be a serious social as well as economic issue.

Such are the implications for individuals and business that nation states have underpinned their economies on an unprecedented scale. The Financial Conduct Authority, as financial regulator and guardian of consumer rights, has also taken action though the courts to create certainty and stability in the sector, culminating in the recent Supreme Court decision.

As every aspect of life throughout the world has been touched by recent events and society adapts to the new normal, it is only to be expected that the insurance market will be profoundly changed by events that have caused huge global dislocation.

Why insurance matters

Whilst this pandemic has rightly been characterised as unprecedented, it has in fact been foreshadowed and potentially even enabled by climate-induced environmental change. Such a pandemic cannot be dismissed as an out-of-the-blue, once-in-a-generation anomaly; rather it is an integral part of our evolutionary cycle. As governments grapple with overhauling public health polices and strategies to address global warming and other environmental challenges, insurers will be at the forefront of dealing with such existential risks. Whilst the hallmarks of the insurance industry have always been agility and innovation in the face of novel issues, never have the stakes been higher, or the need for the certainty and financial stability provided by the insurance industry been more important. This pivotal role played by insurance as a financial safety net when disaster strikes has been demonstrated by the COVID-19 pandemic.

The Chancellor mentioned the importance of the support provided by BI cover when rolling out his initial package of financial aid. The insurance industry is a key sector in the economy, and insurance is a cornerstone of the economic pyramid. Whilst no doubt the market will evolve and adapt in the face of myriad challenges, the need for, and the tangible benefits of, insurance cover - at centre-stage whilst the world was on hold - have never been clearer.

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