Shock to the system

The re/insurance market now knows exactly what a pandemic looks like, according to Kroll.

By Marc Jones, Associate Editor

If the re/insurance industry had some theories in the past about what a global pandemic might be like, it certainly knows exactly what to expect now. Peter Giacone, Managing Director and Global Head of the Insurance Ratings team at Kroll Bond Rating Agency (KBRA), points out that pre-COVID-19 the market certainly considered pandemic risk when they did their modelling, but that no-one had ever actually lived through a full-fledged event such as COVID-19. Although they had experienced more limited viral outbreaks such as SARS, nothing as extreme as COVID-19 has been seen in modern times.

“I think what it’s bringing to the forefront is that effective enterprise risk management is not something that sits on a shelf – it’s actually something that is lived out every day,” says Giacone. “So what we’re seeing and what we think this event is going to precipitate is a bit of a shakeout that will highlight those firms with dynamic and flexible enterprise risk management systems that can actually adapt to the new realities literally in real time as the pandemic has continued to evolve.”

As the market moves into 2021, Giacone expects to see changes to policy language that’s driven by each company’s specific experiences in this space. He thinks that the market is certainly going to see that with respect to business interruption policies but beyond that, he thinks that most insurers are going to step back and take a very holistic look at their enterprise risk management systems.

 “We’re going to actually see, as companies start to report their results over the next 6 to 12 months, that the firms that have real enterprise risk management which is flexible and well encompassing are going to fare better,” he says. “As a result, it’s going bring about some organic differentiation among the firms that an event like this really brings to the forefront in terms of how well they performed.

“I also think the impact of COVID-19 is going to be very product line specific. What we’re finding is that the impacts by company are also kind of building on this ERM point in that the impacts themselves are very individualised to the company based on their books of business. So even within the same sector and even within the same line of business there’s going to be a broad range of outcomes.”

Giacone also thinks that there’s also going to be a big emphasis on the data. People will ask if a firm is actively capturing the emerging data in their systems and he believes that there’s going to be a renewed emphasis on technology as well in order to feed that ERM framework and support more real time reporting.

In addition, one thing that KBRA is hearing is that mortality to date has not materially changed very much in the aggregate despite the coronavirus. Yes, there is obviously the tragedy of COVID-19 and an increase in deaths because of that but the flipside is that the shutdowns have most people staying home reducing travel accidents and other riskier activities. These temporary lifestyle changes will impact mortality in the near term as well as the long term.

“There’s also more emphasis on people looking at cyber insurance and making sure they are properly covered and in event of this kind of attack I think a situation like this absolutely drives home the point,” says Giacone. “There are risks and the dangers that you may not have seen before when you have your entire workforce working from home and no longer in the office and relying on the technology protection offered by that office. I think cyber security, as a general rule, was easily overlooked or sometimes captured as a bolt-on to a larger policy for many years.

“I will say that last year I got the sense from several market participants that interest and demand for cyber coverage on a stand-alone basis was growing. I think that the coronavirus pandemic is going to accelerate that trend because the companies can more readily see their technical vulnerabilities. So, I would agree with the notion that cyber security coverage will be something that insurance buyers will be looking for and I think risk managers will pay a lot more attention to.” 



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