At Large
Compare and Contrast

• Stephen Catlin
• November 2020
• 

It has been more than nine months since the first cases of COVID-19 were reported. I believe it's time to examine the potential long-term impact of the pandemic on the property/casualty insurance industry.

It is currently impossible to estimate with any precision how much coronavirus-related claims will cost. I've seen various reports that estimate total COVID-19-related losses at between $40 billion to $60 billion. My own view is that claims arising from the pandemic will actually amount to $100 billion to $200 billion. It's rare that financial losses from a major event do not exceed early estimates.

People with whom I have spoken have noted a similarity between the potential impact of COVID-19 on the insurance industry and the impact caused by 9/11. I partly agree. In both cases, the industry faced a severe loss event while, at the same time, needing to strengthen casualty reserves.

I wrote about the current shortfall in casualty reserves in February. Until about a year ago, insurers had generally underpriced casualty business for more than a decade. As a result, I estimate industrywide casualty reserves could now be deficient by $100 billion to as much as $200 billion.

Despite some similarity, however, there are significant differences between 9/11 and COVID-19 in terms of the impact on insurers.

First, there is the matter of quantum. In 2001, the overall deficiency in casualty reserves totaled approximately $25 billion, while the cost of all claims relating to 9/11 amounted to less than $30 billion. Even when taking into account inflation and the substantial increase in the industry's capital base, insurers today face a much larger problem than then.

There are also timing differences between the two events. The reserve deficiency in 2001 developed over about a five-year period, compared with a 10-year period for the current situation, making the shortfall in 2001 easier to quantify. Perhaps more importantly, claims arising from the events comprising 9/11 settled relatively quickly, except for the property coverage dispute for the Twin Towers. There was relative clarity regarding the size of the overall 9/11 loss within two years.

It will take much longer—perhaps up to five years—to calculate with reasonable clarity the cost of COVID-19 claims. The complicating factors include uncertainty over whether policies actually cover coronavirus-related losses, uncertainty over the definition of what actually constitutes a loss and, inevitably, aggressive actions by the plaintiffs' bar.

We also must keep in mind the severe impact on the global economy caused by COVID-19 and the likelihood that the worst might be yet to come. Insurers have already suffered an asset loss estimated at between $50 billion and $100 billion due to the pandemic. That, however, may be the tip of the iceberg. Economic fundamentals appear to be in terrible shape. We are facing unprecedented unemployment levels, which in turn will shrink consumer spending. Many sectors—including retail, travel, hospitality and entertainment—are facing extremely serious problems, and it's logical that knock-on effects will be felt by other industries.

I would not be surprised if there was another global financial crisis by the end of 2021.

What does all this mean for insurers? It is likely they will be hit with a vast level of COVID-19 claims. There is a casualty reserve deficit that must be addressed soon. Finally, the industry faces a potential economic downturn that could significantly reduce the demand for commercial lines of insurance, meaning that premium volume may remain static despite the prospect of significant rate increases.

Rates will probably not rise forever, but if the scenario I have outlined comes true, the industry will not be able to afford to reduce rates for a few years to come. The future looks challenging for the industry, but there will be opportunity for insurers to prosper so long as they have the right risk appetite and the flexibility to deploy capital to different product lines.

Best’s Review contributor Stephen Catlin is the founder of Convex Group and Catlin Group and former executive deputy chairman of XL Catlin. He is a member of the International Insurance Society’s Insurance Hall of Fame. He can be reached at bestreviewcomment@ambest.com.