An Industry Transformed
The global pandemic raises questions about the insurance industry’s present and future relevancy.
- Meg Green
- September 2020
In 2019, Swiss Re estimated a $1.2 trillion protection gap between the world's economy and available insurance protection—this was before the COVID-19 pandemic demonstrated all too clearly that a theoretical insurance gap can cause real economic pain.
From commercial businesses being surprised that they lacked business interruption cover to consumers unsure if their life policies would pay out in a pandemic, the COVID-19 pandemic raised questions about the insurance industry's present and future relevancy.
A panel of industry experts discussed how insurers are evolving and could become more relevant in a post-COVID-19 world.
Robert Hartwig, University of South Carolina
Neil Sprackling, Swiss Re
Pina Albo, Hamilton Insurance Group
Suki Basi, Russell Group
Gap Too Big to Bridge
“On the capacity side, the reality of it is, is that to fully close the protection gap would require vastly more capital than the industry currently possesses,” said Robert Hartwig, director of the Center of Risk and Uncertainty Management, University of South Carolina. “That is made abundantly clear in the United States alone, purely through the business interruption exposure, or the potential business interruption exposure that we see.”
Hamilton Insurance Group
When the virus began to spread in the United States, many state governments began closing businesses and mandating quarantines. Many U.S. businesses were surprised to discover they were not insured for pandemic-related business interruption.
While lawsuits challenging policy language are likely to continue for years, the American Property Casualty Insurance Association estimates that business continuity exposure across all U.S. businesses is about $1 trillion per month. The total capital base for all property/casualty lines is $800 billion, Hartwig said.
“That tells us one thing and what we've also learned from COVID is that there are simply some risks out there that cannot be fully insured in the private sector,” Hartwig said. “They fail most of the acid tests, if you will, the requirements for insurability, such as the ability to diversify risk. How do you diversify a risk when every single business unit in America—or essentially every single business unit in America—is impacted simultaneously? There's no way to diversify that sort of risk. Certainly not within the private sector.”
In the wake of the Sept. 11 terrorist attacks, many commercial insurers faced lawsuits challenging whether the World Trade Center's destruction should be considered one loss or two. While that litigation lasted years—and yielded mixed results for insurers—it forced the insurance industry to buckle down to improve contract certainty.
This year, the pandemic brought that issue to the forefront again.
The insurance industry needs to focus on contract wording to resolve the confusion of what is, and what is not, covered, said Pina Albo, chief executive officer of the Hamilton Insurance Group.
per month - the estimated business continuity exposure across all U.S. businesses.
The total capital base for all property/casualty lines.
Source: Robert Hartwig, citing American Property Casualty Insurance Association
“A lot of what's going on right now [is] uncertainties revolving around wording that was opaque or unclear,” Albo said. “If anything, maybe that will be something to focus on going forward, the clarity of the contract that we offer and the clarity of the coverage, so that the consumer understands what it is that they are buying.”
Insurance contracts and jargon are notoriously difficult to read and understand.
During the pandemic, Swiss Re surveyed U.S. and U.K. life insurance holders and found 37% of consumers weren't sure if life insurance policies would pay out for a death related to COVID-19.
“That's the stat that was a surprise,” said Neil Sprackling, president, Swiss Re U.S. Life Health. “The number is even higher if they didn't have a life insurance policy.”
Swiss Re reached out to a number of its primary life insurers, who thought that consumers understood a standard life insurance policy would pay out if they died during a pandemic.
“You've got a disconnect between what the consumer's saying ... that they're not sure ... and the insurers are saying, 'Yeah, we're clear,'” Sprackling said. “We've got to close that gap. There's a perception gap, not just the protection gap here, and people understanding fully what they're buying.”
That perception gap “gets more confusing if you widen it out into the broader insurance coverages, because obviously then you're into things that are not covered. In life insurance, honestly, it's fairly black and white. It says, 'If the person, unfortunately, passes away, we will pay out in those circumstances,'” he said.
This uncertainty is “actually an opportunity,” Sprackling said. “For me, the opportunity here is around consumer engagement. This is around demystifying the coverages, whatever line of insurance that we're talking about, highlighting, and the benefits of educating consumers, raising awareness.”
Insurers are being forced to consider the intangible, Albo, said.
“The insurance industry can get their hands around tangible objects and assigning a value and how to rate those aspects. When it comes to intangible, it gets a little bit more difficult to value and therefore, to insure. What is the value of a [name like] Apple?” Albo said. “That is very difficult and it shows the limits, to a certain extent, to what insurance can provide and not provide.”
Only 20% of commercial risk is insured, according to a study by the Russell Group.
The industry, despite having a reputation for being stodgy and backwards and old-fashioned—the reality of it is, it’s quite innovative.
University of South Carolina
“The one key takeaway … [is] that leading up to the pandemic, insurers were largely peril-driven, whereas the corporates are actually, a heartbeat even more so, risk-driven,” said Suki Basi, managing director of the Russell Group, a risk management data and analytics company.
Risk managers are starting to look from “outside-in” at their companies' risk, versus from “inside-out.” For example, supply chain risk has emerged as a major issue during the pandemic.“The connectivity and the relationships between companies is very important to understand more,” Basi said.
While the pandemic highlighted the fact that not all risks are insurable, there is more that the industry can be doing to close the protection gap, Albo said.
“Whether that involves geographically looking at areas which are underserved for insurance and providing more protection there, or even looking at some risks that are new and emerging, like cyberrisk where the industry has come and provided some protection for that risk,” Albo said. “Certainly, the industry is not capable of underwriting every risk that is out there.”
Albo said the pandemic “has allowed us to go back and revisit what coverages could we offer as a result of a scenario such as this.
“This whole COVID scenario has given us a lot of opportunity to think about how we operate our businesses and also what kind of coverages we can offer on a go-forward basis,” she said.
Hartwig said the insurance industry has always responded after major events, such as developing terrorism insurance after Sept. 11 or launching more capacity to cover property catastrophe risk after Hurricane Katrina in 2005.
“We typically see insurers at the forefront of what this new risk landscape is and to find solutions,” Hartwig said. “The industry, despite having a reputation for being stodgy and backwards and old-fashioned—the reality of it is, it's quite innovative.”
New emerging opportunities include event cancellation type coverages, he said.
“There's a lot of risk that is going to have to be laid off for events, large and small, from the Olympics and Wimbledon, on down to your local hometown sporting events, all of those sorts of things,” Hartwig said.
“There's an opportunity for this industry to do what it has always done, to do what it has always done well, and that is, almost getting back to what we began with, we will be helping to close some of those gaps that we now see are quite gaping and satisfy some of the demand that is out there,” he said.
From a life/health perspective, “it takes a pandemic to get people to think about their own personal and family protection,” Sprackling said.
Some of these big events are just showing where that collaboration can be most effective. No one party, be it public or private sector, can solve the challenge on their own.
Life insurance sales also spiked after 9/11, but just for a couple of months, he said. Sales also increased during the pandemic.
“The challenge and the opportunity for the industry is to have something that's more sustainable, Sprackling said.
He added he expects to see insurers continue to rely more on digital means to do business, including sales and collecting the data needed to underwrite life insurance.
“Ultimately that will put more insurance in the hands of the consumer and it will make us a more efficient industry as a result. There's reasons to feel wildly optimistic,” Sprackling said.
Basi said the key to transmuting the uninsurable to the insurable is information.
“There's going to be a lot of risk areas that aren't insurable, but from what we're told, there are plenty of currently uninsured that potentially are insurable if there is better data available,” Basi said. “The small change or small penetration of the uninsured bit is actually a big change for the industry in terms of premium dollars in.”
One important component going forward is likely to be private-public partnerships.
“We model that pandemic risk, but the sheer scale of it means that that can't be borne entirely by the private sector, which, I think, is a point that was being made,” Sprackling said. “I think that's going to lend itself for more collaboration with governments around the world on how you can cover risks of this scale and magnitude.”
Collaboration, he said, will be key.
“Some of these big events are just showing where that collaboration can be most effective. No one party, be it public or private sector, can solve the challenge on their own,” Sprackling said.
”I'm not concerned about relevance in this context. The industry has been around for 400-plus years. There's a reason in a global pandemic it's designated an essential business, because we are, as often described, the backbone to the economy in many respects. From that perspective, the relevance remains.”