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COVID-19, climate and a changing world. Must insurers pay the price?

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

What impact will COVID-19 have on the insurance industry?

The pivotal role played by insurance as a financial safety net when disaster strikes in novel ways has been demonstrated by the COVID-19 pandemic. The Chancellor mentioned the importance of the support provided by Business Interruption (‘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. 

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. Across the pond, the U.S. also experienced its own insured losses with hurricanes Florence and Michael reported to have led to 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, therefore, 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 as they rose by six per cent from the first quarter. Dramatic rises to reinsurance rates of 30–70 per cent had even 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 scheme, Flood Re, seeks to more evenly distribute the cost of home insurance in high-risk areas by requiring all home insurance consumers to pay a top-up of approximately £10 per year on their existing premiums to subsidise the higher cost of insurance cover in such areas to make it more affordable.

However, despite these alarming figures, some commentators and forecasters have found cause for optimism. RBC has commented that it believes that:

“Climate change presents a number of opportunities for reinsurers.”

However, 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 cover from key sectors altogether.

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

In the coming decades, economists have predicted that the average annual economic losses attributable to pandemics will rival the estimated losses caused by climate change and will represent 0.7% of global GDP. The occurrence of disease outbreaks has 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 are also clear to see, with the Commission on a Global Health Risk Framework for the Future estimating the annual cost of flu pandemics to be close to $60 billion.

What about the link between global warming and pandemics and its effects?

It has been claimed that the COVID-19 outbreak had zoonotic origins, and was transmitted to humans from 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 recent pandemic prompted Lion Coalition, a group of over 200 global wildlife organisations, to write an open letter to the World Health Organisation which claims 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) offer reduced figures but repeat the same 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 made the clear link between global warming and pandemic outbreaks in 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.”

As was evident in the timeline of COVID-19, factors such as growing urban populations and inter-continental travel mean that diseases such as coronaviruses are spreading throughout countries and across borders faster than ever.

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). 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 contract includes a small premium contribution to 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 euros, and the state then follows.

What does the future hold?

Will the risk of future pandemics, or the continued effects of climate change, lead to further increases in premiums? Could premiums become unaffordable for the general public?

Munich Re’s chief climatologist has warned that increased risks of natural events will lead to a rise in premiums which may become a social issue, 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.”

The current pandemic has caused many insurers to make and review decisions on policy cover, wordings and the scope of cover. Such are the implications for individuals and business that not only has the state become the economic foundation of the nation but the Financial Conduct Authority has, as financial regulator and guardian of consumer rights, taken action though the courts to create certainty and stability in the sector.

Such milestones may also coincide with the start of a mammoth review of risk exposure, assessment and pricing throughout the insurance industry and across the spectrum of risk affected by pandemic and global warming issues. 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.

Nic Brown, Director of Markel UK, maintains that:

“Whilst recent events have presented novel challenges, the hallmarks of the insurance industry are agility and innovation in the face of emerging risks and threats. At Markel we are navigating our policyholders through the current crisis and we will continue to develop new and effective insurance solutions offering a proactive approach to those seeking protection for their businesses in a volatile and changing environment.”
Nic Brown Director of Markel UK

The pivotal role played by insurance as a financial safety net when disaster strikes in novel ways 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 - has never been clearer.

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