Pandemics hammer P&C much harder than life: Kessler

By Ahmad Zaki

Pandemic risk is invisible, triggering both a collective and individual sense of fear and vulnerability, said SCOR chairman and CEO Denis Kessler during his keynote address yesterday evening.

“A vast majority of risk can be visualised, but a virus spread is invisible, insidious and pernicious. People are infinitely more afraid of dangers they cannot see than the danger they can identify. An invisible risk produces more paralysis and anxiety and is considerably more forceful,” he said.

He pointed out that there were other invisible risks that gripped the world in a similar fashion – asbestos, AIDS and nuclear radiation. Before COVID-19, cyber risk had occupied the world’s attention as the foremost invisible risk. “It is no coincidence that the term ‘virus’ is also used in computer science,” he said.

All of this explained the various moves governments and central banks around the world made in reaction to the pandemic – from early denial that the problem even existed, followed by strict measures to protect the health and safety of citizens, to the current grappling with the economic fallout. There was an obvious priority on health over economic stability, he said, which caused the biggest surprise of COVID-19: The massive impact it had on the P&C insurance space.

All of these factors combined caused COVID-19 to be a ‘fractal shock’ to the (re)insurance industry, one that has extensive ramifications and generates multidimensional impacts, whether health-related, economic, social or geopolitical.

A risk long identified

Mr Kessler noted that the industry had been aware of the risk of an emergent pandemic for a while and had been taking steps to attempt to quantify and mitigate the risk. However, almost all models of a pandemic risk assumed the biggest impact would be to the life insurance sector, and the industry acted accordingly.

This crisis has shown that most of the industry had previously viewed pandemic risk through “too narrow a prism”. The modelling approach for this risk had a strong life focus, mainly looking at the probability distribution of the number of victims, with the P&C and macroeconomic components being treated in a much more simplified manner.

Further, it was mostly carriers with a significant life book that had bothered even to monitor and manage their expected pandemic risk exposure.

“It is also telling that the rare ILS issued by (re)insurers to provide specific pandemic risk protection have so far only taken the form of extreme mortality bonds, which specifically cover excess mortality risk,” he said.

The industry must comprehensively analyse the knowledge gained from COVID-19 and factor it into their future quantifications of pandemic risk, he said.

Inefficient public risk management

While prioritising public health was the right move, the measures taken by public authorities around the world – mainly lockdown and restricted movement orders – caused much of the P&C exposures seen over the past nine months. “Credit and surety and property business interruption exposures resulted from the negative economic consequences of the lockdown,” he said. “Their magnitude is driven by a myriad of variables directly controlled by public authorities.”

Largely, the exposures were due to inefficiency of public risk management in many countries around the world. The economic cost of the crisis, and the exposure of the P&C market, would have been much less significant had these nations been better prepared and more responsive.

“All else being equal, the poorer the public risk management, the higher the economic losses associated with the handling of the pandemic and the higher the P&C market exposure to the pandemic event,” he said.

Create the right corporate culture for digitalisation

By Ridwan Abbas

Insurers looking to digitalise their business further should focus on getting buy-in from employees in order to realise a digital mind-set throughout the organisation.

Speaking at the panel discussion on the way ahead for digitalisation in insurance, PwC Data Trust Services managing director Ronald Chung said that resistance from employees to embrace greater digitalisation for fear of being made redundant is a common concern.

He suggested that companies start small by picking the ‘right use case’ to implement digitalisation measures and proving the value-add it offers.

"When you are able to show value in one area, the rest of the organisation sees it and they will be more receptive to change," he said.

"You ultimately want to move the entire organisation to a digital mind-set … so you need to bring everyone along by showing them that digitalisation allows them to do higher value work. And this upskilling is important because they are then less likely to be made redundant by machines,” he said.

Trends around digitalisation

Swiss Re global head of P&C solutions Pranav Pasrisha, moderating the discussions, had earlier laid out five mega-trends which would influence digitalisation in insurance.

The first relates to 'intelligent insurance', with carriers looking to develop more 'active products' like usage-based insurance. Such offerings are characterised by dynamic pricing and coverage, as well as the use of predictive modelling in underwriting.

The second relates to embedding coverage or protection within the purchase of a product, service or platform, while the third deals with autonomous processes such as touchless claims and parametric coverage.

The fourth factor relates to the evolution of the insurance value chain, with some risk owners – for example Tesla – opting to underwrite risk. The evolution also sees different eco-systems interacting with the traditional insurance value chain, which creates both opportunities and threats for incumbents.

And the last trend relates to new risk pools – for example the advent of autonomous vehicles raises liability issues in the event that machines and AI fail.

Plugging into ecosystems

Commenting on the embedded insurance model, ZA Tech head of commercial George Kesselman said that a lot of businesses are seeing value in including insurance as a complement to their core product or service.

"They are seeing how insurance provides more value-added services for their customers, while also generating revenue," he said.

ZA Tech, a subsidiary of Chinese digital insurer Zhong An, regularly embeds insurance offerings within major internet ecosystems and believes in building insurance which is both customer- and ecosystem-centric.

Cover Genius managing director, Asia, Arijit Chakraborty, also believes in the potential of embedded insurance by unbundling traditional insurance products into bite-sized solutions.

"We come up with dynamic pricing and coverage that is suitable for clients, while also making processes such as claims automated."

However, he pointed out the ineffectiveness of trying to push traditional insurance products into the digital ecosystem, which means that insurers need to customise their digital offerings.

"You need to find a contextual product for that user and the customisation that is relevant to that customer," he said.

In that regard, panellists agreed that not all products are suitable to be sold online and a hybrid human-digital model is the way to go. Hence, cutting out intermediaries such as agents fully is neither feasible nor likely.

A great time to launch because of market dislocation

AM Re holds a unique place in the US, as one of the largest quota share reinsurers in the US market. We spoke to AM Re Syndicate CEO Shevawn Barder about how she sees the market and the syndicate’s plans for 2021.

What plans does AM Re Syndicate have in 2021?

SB: “We have had an exciting 2020 at AM Re where we have restructured the group with a holding company, AM Star Hold Co, which owns and operates AM Re, the non-risk bearing entity, and ASI, the prospective E&S carrier. Looking to the future, AM Re will continue as an MGA in the specialty programme space with capacity of a minimum of $750m. In respect to ASI, we will have the ability to write excess and surplus lines across diverse classes with a capacity of $250m in year one. AM Star Hold Co will have a combined income of $1bn in 2021.”

What trends in the reinsurance market make you see now as a good time to launch a new carrier?

SB: “It’s a fantastic time to launch a new company. There is so much dislocation currently in the market due to the COVID-19 pandemic. Companies have not had the ability to reserve or anticipate these losses so there will be a sea of change to the market; particularly in the excess and surplus market line space.

Starting an E&S carrier is a natural extension of our existing model because we are currently writing this business through AM Re on a programme quota share reinsurance basis. The underwriting team at AM Re has a high level of technical underwriting capability. We are effectively writing this business as if we are primary writers. We have the primary expertise to understand and create profitable quota share portfolios. The great thing about quota share programme business is that the interests of all parties are aligned to create a profitable outcome.

What is the appeal for Asian securities to do business in the domestic US?

SB: “We love working with Asian securities. This is mainly because they have a long-term view when it comes to relationships. They are very relationship oriented. We started our association with Asia in 2017. We have consistently built on that. We bring great diversification to their domestic portfolios because our programme business is indigenous US business that is grassroots, low average value and well geographically spread. Our portfolios do not travel into the international market, so not competitively oriented. We have a very high renewal retention rate and a very low risk limit profile so it’s ideal for large Asian companies to diversify their portfolios and get a very economic foot-in-the-door in the US market. We have very low overhead costs and utilise an efficient model structure. Our track record speaks for itself having been in this space for 20 years. So, we have a tried and tested model that is consistently profitable”

How will the growth of AM Re in 2020 lead to the successful launch of the new carrier in 2021?

SB: “We have strategically looked at our position in the US market. As a result, we relocated from New York to Dallas to focus more clearly on the programme market. We have built out our team, we have expanded our management structure to include Mr Ernie Zayicek and Mr David Saylors and hired additional support on the analyst side. We have real depth and expertise within our company. We are always looking for new opportunities to grow and better ways to support our team.

Against all the odds

By Paul McNamara

It would be hard to describe the successful opening of the SIRC 2020 - RE-MIND as anything other than a blistering success. In the midst of the biggest health crisis in a century, the event managed to snag 1,500 registered delegates that delivered a peak of 600 concurrent attendees on the first day.

The gut instinct of Singapore Reinsurers’ Association chairman Marc Haushofer to press on with a virtual event in the face of opposition proved to be a masterstroke – in spite of the fact that both Les Rendez-Vous de Septembre in Monte Carlo and the Baden Baden Reinsurance Meeting were cancelled for 2020 and were in danger of setting a precedent for insurance industry events.

“As months passed and COVID-19 infections continued to rise unabatedly across the globe, the organising committee started to question whether we would also have to ‘bite the bullet’ and push back or cancel the 17th SIRC,” said Mr Haushofer in his welcome address at SIRC 2020 - RE-MIND.

“When we eventually had to make the painful decision to reschedule the event to 2021, we also had much resistance on whether we should organise a virtual event during this period, with the sceptics among us citing ‘video conference fatigue’ as a strong argument against going virtual,” he said.

Determination pays off

In the event, delegates at the virtual event were richly rewarded for logging on and taking part, gaining exclusive insights from Singapore deputy prime minister, coordinating minister for economic policies and minister for finance Heng Swee Keat in his official keynote address as the guest of honour and Swiss Re group CEO Christian Mumenthaler in a fireside chat. Day two offered insights from SCOR chairman and CEO Denis Kessler and much more besides.

“We are glad that we have stayed the course and remained determined,” said Mr Haushofer and few delegates would disagree.

Asia Insurance Review has been the official media partner for the SIRC since its launch in 1991.

Threat of cyber terrorism to commercial property

The Australian Reinsurance Pool Corporation has taken a lead on cyber terrorism research – which it sees as a potential threat to the orderly working of commercial real estate markets in the world’s capital cities. Dr Christopher Wallace talks us through the results of some recently-published research results – and its wider implications

By Paul McNamara

The harsh reality is that an act of cyber terrorism that leads to the destruction of, or damage to, commercial real estate could fall outside the scope of traditional insurance cover. Think of an office tower block that burns to the ground because a server room or individual computers are hacked to the point of combustion.

That such a terrorist act could undermine the very foundations of the commercial property sector is more than just an imaginary threat – and so the Australian Reinsurance Pool Corporation (ARPC) has been looking at the practicalities of extending insurance coverage to include cyber terrorism in Australia.

ARPC is Australia’s terrorism risk pool - a corporate commonwealth entity established under the Terrorism Insurance Act 2003 following the terrorist events that occurred in the US on 11 September 2001.

Recent research

ARPC commissioned the Organisation for Economic Co-operation and Development (OECD) and Cambridge Centre for Risk Studies at the University of Cambridge’s Judge Business School (Cambridge), to undertake some ground breaking research to explore this area in depth.

“Commercial property insurance in Australia does not cover physical property damage caused by cyber terrorism or cyber war,” said ARPC CEO Dr Christopher Wallace. “The ARPC Scheme, Australia’s national terrorism insurance scheme also excludes coverage for physical damage caused by cyber terrorism.”

Simply put, cyber terrorism is not covered by commercial property insurance in Australia, and the terrorism reinsurance scheme administered by ARPC excludes cover for cyber terrorism.

The analysis conducted by Cambridge demonstrated that the maximum losses from two modelled cyber terrorism scenarios could be substantial and would exceed the capacity of the ARPC scheme – which could seriously undermine the investable profile of commercial real estate as an asset class.

Regional ramifications

While the research was focused on Australia, it seems likely that the insights derived could be usefully applied to other markets in the Asia-Pacific region.

“The lessons learnt in Australia are probably as relevant for the Asia-Pacific region,” said Dr Wallace. “Commercial property insurance generally excludes terrorism and war, and as such, cyber terrorism or acts of war through cyber by nation states would be excluded.

“In the rapidly-developing cyber-insurance market, there is cover available for terrorism, however, the sub limits covering physical property are relatively small and are designed to cover damage to computer hardware, not buildings. There is an insurance gap for cyber terrorism that causes damage to physical property.”

From cyber to physical damage

The research also identified several realistic scenarios whereby a cyber attack could result in physical damage to buildings and other infrastructure.

“This shows that it is possible to damage assets remotely using cyber attacks and there have been past examples of physical damage from cyber attacks,” said Dr Wallace. “Many insurance policies cover physical damage from cyber attack unless other exclusions are applicable to the event such as a terrorism exclusion clause in the general exclusions section of the policy.”

Does Dr Wallace see any avenues for furthering the research – either by going deeper or by broadening the scope?

“Yes,” said Dr Wallace. “On a related matter, ARPC is seeking to clarify the ‘computer crime’ exclusion in the Terrorism Insurance Act 2003 (TI Act). The computer crime exclusion in the TI Act means that the act will not remove the terrorism exclusion clause for cyber terrorism.

“This effectively means insurers are not covering physical property damage and business interruption losses from computer crime due to terrorism,” he said.

Pools for pandemics

There has been a lot of talk around the world in recent months about taking a ‘terrorism risk pool’ approach to pandemic risk – and, indeed, of subsuming pandemic risk under terrorism risk pools. Is this an area that ARPC had been consulted on and feels that there it can contribute to the debate?

“Yes, I recently contributed to an OECD Insurance and Retirement Savings Roundtable webinar on the topic of ‘Designing a pandemic risk insurance programme’,” said Dr Wallace.

“In Australia, we are seeing pandemic risk excluded from insurance policies. It is becoming an excluded peril much like terrorism. In Australia, the TI Act overrides terrorism exclusions in eligible policies in response to a declared terrorist incident. Therefore, it is feasible to have a declared pandemic, and to over-ride pandemic exclusions in eligible policies in the same way that terrorism exclusions are overridden.

It seems likely that a terrorism and pandemic scheme could provide certainty of cover to policyholders and could be beneficial to the insurance industry provided the over-ride is part of a risk transfer.

Pricing correction ought to be gradual

The transition towards risk-adequate pricing ought to be done over a period of time, with cedants more resistant of a correction of over a single renewal cycle, says Willis Re’s managing director for Asia Pacific Mark Morley.

Helping Asia’s SMEs get justice in a COVID-19 world

Access to justice has never been more important for small-to-medium-sized enterprises (SMEs). The recession caused by the global pandemic creates an environment where legal disputes are much more likely; for instance, customers or suppliers may renege on contracts or laid-off employees may sue for unfair dismissal.

The cost and complexity of legal action make many businesses reluctant to protect their rights. They may have legitimate concerns that should a legal action be unsuccessful, they will be required to pay not only their own legal costs, but also be exposed to those incurred by the other side (adverse costs) – and these can mount up quickly.

Most SMEs are concerned that they do not have deep enough pockets or the knowledge and expertise to protect their legal rights. Legal expenses insurance (LEI) can help redress the balance if policyholders have been wronged and need to enforce their rights or defend their position through the courts. This type of insurance has been available for decades in Europe, Canada and Australia, giving businesses the financial comfort to take out or defend a lawsuit.

Other kinds of business insurance such as general liability, directors’ and officers’ and professional indemnity do not cover the types of disputes that are insured under the LEI, for example: Contract, property, tax investigations, breaches of health and safety, data protection, employment disputes, and licence issues. With lawyers’ charges starting at $300 per hour, bills can quickly rack up. This policy provides financial support to the policyholder to be able to take on their opponents, and not shy away from enforcing and defending their legal rights.

Recession leading to more disputes

The pandemic and the downstream economic effects have arguably had a greater impact on SMEs than any other event globally. Many companies are just surviving with significantly reduced revenues, cutting costs and being forced to lay-off staff. Additionally, many have had to renegotiate contracts with their customers and suppliers, or work reduced hours to ensure their business can survive. All these changes bring legal risk and increase the probability of disputes more than ever before.

During this period, any spending by SMEs will be under very close scrutiny. Insurance policies that may have been purchased and renewed without much thought previously, will now have to demonstrate clear value and relevance. LEI is bought as an add-on to any commercial business insurance package – and at this time can be seen as a fiscally prudent move that could save businesses considerable costs and expenses during these troubled times.

Insurers offering cover to this sector need to ensure that their offering is relevant and up to date – and LEI is an offering that they should consider very carefully in this context.

LEI made sense in a pre-COVID world, but now it is even more relevant and valuable when SMEs will often get into disputes. This cover may well become a lifeline for Asia’s SMEs - in both a COVID-19 and post-COVID-19 world.

What LEI covers

It will cover legal costs that may arise in a variety of everyday disputes that an SME will face in the conduct of their business activity. Legal actions are expensive, whoever is at fault and this product offers valuable protection if needed.

The cover will also usually pay for legal fees and expenses, costs of an expert witness (if applicable), court fees - i.e. the cost of issuing the claim at court - and the opponent’s legal costs in the event of becoming liable to pay these.

Telephone legal advice service

Integral to any LEI policy is a telephone legal helpline. This service is provided at no extra cost to the policyholder and is included within the insurance premium, and will provide telephone legal advice on any aspect relating to the policyholder’s business activity by experienced lawyers on a variety of different types of legal issues.

A call to the telephone legal help line is intended to act as a great risk management tool to help protect the policyholder, and often nip the problem in the bud and stop a dispute developing into full blown legal action, thus avoiding a claim under the policy.

Mr Nick Garrity is chief executive officer at IGI Labuan and Mr Terry Mason is a class underwriter, legal expenses insurance with IGI.