The direct financial impact of COVID-19 outbreak on the (re)insurance industry is likely to be limited. The indirect impact is, however, difficult to assess but every indication is that the industry will remain strong and continue to provide the financial support to policyholders, says Peak Re’s Greg Solomon.
To talk about the impact of the coronavirus (COVID-19) outbreak on the (re)insurance industry even before we know how it will turn out seems a little strange.
But it is good to remember that however serious it may turn out to be, it isn’t the first outbreak and it won’t be the last – so it is worth considering the big-picture.
Mini pandemics have a significant impact
Only a year ago I was speaking at an actuarial conference about ‘mini-pandemics’, a concept I had come up with to remind people that although we are most nervous about a massive pandemic that could kill millions, we should also not forget that smaller outbreaks can have a significant financial impact on our industry.
There is the obvious impact on claims – life companies paying more for medical claims and death, and property and casualty companies paying more for lines like business interruption and travel interruption.
Indirect impacts could dwarf the direct impact
The indirect impact, however, could potentially dwarf these. Falling asset values, reducing interest rates to boost the economy, increased unemployment and loss of confidence, all of which could have a major material impact on (re)insurance business volumes.
Insurance companies will be impacted by a pandemic but there are two mitigating factors. Firstly, their portfolio may not be pure ‘risk’ insurance, and hence this may help dilute the impact, and secondly they might be reinsuring a fair volume of their risk business with the reinsurers, where such risks – particularly pandemic risks – accumulate.
When reinsurance business is accepted, even if it doesn’t explicitly address pandemics, it also transfers pandemic risk of death and medical claims. Many aggregate covers, like PA CAT business, would usually explicitly exclude claims from an infectious disease outbreak.
Factors that help reinsurers remain healthy in such events
A major pandemic could be a peak risk for reinsurers, yet there are a number of factors that help ensure they remain well-placed to continue to meet their financial obligations, even during a major outbreak.
- Capital: Different reinsurers are regulated in different countries by different regulations, but a competent capital regime will include pandemic-stresses, to ensure they hold enough capital to cover such an eventuality.
Indeed, reinsurers – as the risk-holders of last resort – would often hold enough capital so that after an event they still have enough capital to deal with another event.
- Diversification: Although reinsurers have proportionally more pure risk business than most insurers, they still benefit from diversification by line of business. Having annuity business helps reduce the overall impact of a pandemic on a reinsurer, even disability business and critical illness business is somewhat immune to pandemics. While some property and casualty lines of business will be hard hit by a pandemic, generally a broad non-life portfolio is diversifying.
- Geography: While geographic diversification usually reduces the impact of outbreaks, in the event of a major global occurrence, this is likely to have less of a benefit, although is still beneficial to the major reinsurers.
- Transfer away: Acknowledging their exposure to pandemics, a number of reinsurers have done specific transactions to mitigate this. These would include simple retrocession (reinsuring the reinsurers who insure the insurers), through value-of-in-force business monetisation (offering out-of-the-money downside protection) and even securitisation to the capital markets (effectively a portfolio aggregate excess of loss).
Reassurance
We will continue to watch how the COVID-19 outbreak develops, hoping that we can achieve global containment soon. The wider financial impact on the (re)insurance industry will be material, however, every indication is that the industry will remain strong and continue to provide financial support to policyholders during this challenging time. A
Mr Greg Solomon is managing director and head of life and health Peak Re.