Covid-19: implications for insurer risk management and the insurability of pandemic risk
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Covid‑19: implications for insurer risk management and the insurability of pandemic risk Andreas Richter1 · Thomas C. Wilson1,2 Received: 21 May 2020 / Accepted: 20 August 2020 / Published online: 22 September 2020 © The Author(s) 2020
Abstract This paper analyzes the insurability of pandemic risk and outlines how underwriting policies and scenario analysis are used to build resilience upfront and plan contingency actions for crisis scenarios. It then summarizes the unique “lessons learned” from the Covid-19 crisis by baselining actual developments against a reasonable, pre-Covid-19 pandemic scenario based on the 2002 SARS epidemic and 1918 Spanish influenza pandemic. Actual developments support the pre-Covid-19 hypothesis that financial market developments dominate claims losses due to the demographics of pandemics and other factors. However, Covid-19 “surprised” relative to the pre-Covid-19 scenario in terms of its impact on the real economy as well as on the property and casualty segment as business interruption property triggers and exclusions are challenged, something that may adversely impact the insurability of pandemics as well as the perception of the industry for some time to come. The unique lessons of Covid-19 reinforce the need for resilience upfront in solvency and liquidity, the need to improve business interruption wordings and re-underwrite the book, and the recognition that business interruption caused by pandemics may not be an insurable risk due to its large accumulation potential and the threat of external moral hazard. These insurability limitations lead to a discussion about the structure and financing of protection against the impact of future pandemics. Keywords Financial crisis · Covid-19 · Pandemic risk · Resiliency · Insurability · Risk management JEL classification G01 · G22 · G32 · H12 Thomas C. Wilson, Until 1 July 2020, Chief Risk Officer, Allianz SE, Munich, Germany; currently, Deputy CEO, Allianz Ayudhya, Bangkok, Thailand and Honorary Professor, Applied Risk Management and Insurance, Ludwig-Maximilians-Universität München (LMU Munich), Munich, Germany. * Thomas C. Wilson [email protected] 1
Ludwig-Maximilians-Universität München (LMU Munich), Munich, Germany
2
Present Address: Allianz Ayudhya, Bangkok, Thailand
Vol.:(0123456789)
172
The Geneva Risk and Insurance Review (2020) 45:171–199
1 Introduction Dramatic events with severe consequences for the financial sector occur with a reasonably high frequency; a non-exhaustive list of examples includes the 2011 European sovereign debt crisis, 2008 financial crisis, 2002 SARS epidemic, 2001 dotcom bubble, 1997–1998 Asian-Russian crisis, and 1987 Black Monday. Notwithstanding their frequency, each event or crisis has a unique origin, a unique evolutionary path and a unique denouement in terms of its impact on the insurance industry and society more broadly. Because of their uniqueness, insurers and regulators often adapt their risk management and supervisory frameworks following a crisis to reflect the unique “lessons learn
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