The human consequences of the coronavirus pandemic are all too clear. The full economic impact of the various government lockdowns in place around the world are yet to emerge. However, even at this stage it is certain that the impact on the global economy will be massive: probably beyond any of our experiences. The impact will be felt everywhere, including on the private insurers with whom we place our clients’ business. What shape will these insurers be in when we emerge from the crisis? Will the private insurance market join the list of sectors seeking government bail outs?
The answer is very simple. The private insurers will be impacted by the crisis, including obviously in our sector, but we are very confident that the private insurance market globally will emerge in sound financial shape with private sector insurers generally able to meet the commitments they have made to policyholders. The reason is simple: private insurers aim not to make promises they cannot keep.
However, the wider insurance market will undoubtably suffer some adverse publicity. This will arise because the business interruption (BI) policies companies typically buy will usually not have responded to the pandemic. Even businesses that have been forced to close their doors during the government lockdowns will have been disappointed. They will have usually found that either the BI cover is only triggered by direct physical loss of damage to its own property, whether by fire, flood, or other perils; or that pandemics are specifically excluded; or both. While “non-damage” BI is often discussed, such coverage remains rare in general insurance policies. Policyholders, commentators and politicians are already asking: why?
The answer is the one given above: our industry is not in the habit of making promises it cannot keep.
In explanation, we need to look at numbers, and specifically at the difference (in US Dollars) between a million, a billion (a thousand million) and a trillion (a thousand billion). To many people these figures are simply mind-boggling: so large they are often confused. But we in the insurance market are clear about the difference, and in the context of the global property/casualty insurance sector:
- A million US dollars is a rounding error: an immaterial sum at the industry level.
- A billion US dollars is a material amount, but quite comfortably dealt with at the industry level. Every year the global industry expects multiple catastrophe losses that individually cost the industry billions in claims. The USD 140 billion of claims that emerged in the US from the 2017 hurricane season and other natural disasters was unusually large, but manageable: by the end of 2017, the global private (re)insurers had taken the same bet on the 2018 hurricane season it had just lost in 2017.
- But a trillion US dollars is a big number. The total annual premium of the global property casualty (non-life) insurance market (home, motor, small commercial, large industrial and specialty – including the very small CPRI market) is about USD 2.2 trillion only. The surplus of the reinsurance market (the industry’s emergency buffer) is about USD 800 billion: a lot; but not bottomless.
The industry does not routinely offer non-damage BI cover for losses such as pandemic because industry leaders have fully recognized that in a matter of months the losses globally would be measured in the USD trillions. The American Property Casualty Insurance Association (APCIA) has calculated that just for small US businesses with 100 or fewer employees, non-damage BI losses from the pandemic, if covered, would amount to between USD255 to 431 billion per month (43 to 72 times the monthly premiums for property/casualty insurance policies in the US). Take those projections to all businesses in all countries, and it becomes clear that the industry has been quite right not to promise to cover these types of loss. Indeed, it would be immoral for insurers to take premiums for such risks today, knowing that they could not keep the promises made tomorrow. The insurance industry has always recognised that some risks are simply too big for it to deal with: nuclear war and war between the Five Great Powers are ones we are all familiar with in our line of business. Pandemic risk is in the same category: it must be left to governments to step in.
The insurance industry will of course be impacted by the pandemic and the government lockdowns, including heavily in specialist classes like travel insurance, event cancellation and of course credit insurance where policies do not normally exclude these types of event. Some non-damage BI losses will emerge too. However, though losses could well be very material in certain areas, these exposures have generally been taken on prudently, and the financial impact on the overall market will be manageable.
You will read other stories about the wider insurance industry. In the USA, particularly, there are inevitably attempts by aggressive lawyers to find BI cover where none was given; and there are even legislative initiatives in some states retrospectively to change the terms of policies to include non- damage BI for pandemics. Some of these attempts and initiatives may even succeed. However, contrary to the impression some like to project, the US political establishment has as much common sense as the rest of us. They are unlikely to allow a few local politicians with an eye to the main chance to put the US and global insurance industry in the position that it cannot meet the promises it HAS made to policyholders, because it is required to honour promises it has NOT made.
There will also be fair criticism of the wider insurance sector. There is no doubt we can play a bigger part in future in dealing with these types of pandemics. Though most of the bill for losses flowing from global pandemics, due to their sheer size, must inevitably still fall to governments, there is a case for conventional BI insurance policies being the delivery mechanism for some of this government support going forward. Similar mechanisms are already in place, for example for terrorism insurance, where government programs like Pool Re in the UK and TRIA/TRIPRA in the USA sit behind cover provided via conventional private sector insurance policies. Such mechanisms exist for other catastrophic exposures. For example, Spain’s Consorcio de Compensacion de Seguros (CCS) deals not only with man-made disasters like terrorism, but natural disasters like earthquake and windstorm.
These examples of public/private co-operation are not new. In both the First and Second World Wars marine insurance risks were considered too great by Lloyd’s and other private insurers, and they were assumed by the UK government (80% reinsured in the First World War and 100% in the Second). In both cases though, the commercial infrastructure of Lloyd’s and the London market was kept in place to deliver and administer the policies in the normal way.
When it comes to pandemics, while we have recognized that the risk is too large for our industry to bear, we have perhaps not done enough. Specifically, we have not sat down with governments and had a productive discussion about how these risks can be dealt with jointly. I am sure the industry will now have those discussions.
So, expect the broad private insurance sector to face some criticism during the crisis. However, generally, this criticism will not come from responsible commentators, who understand the difference between a billion and a trillion, nor from knowledgeable politicians who understand why our industry is not in the business of making promises it cannot keep.
Turning from the bigger picture to nearer home, the specialist CPRI market, mainly insuring non- payment cover for medium and long-term credits and political risks for investments and assets in emerging markets, operates in an area once thought only insurable by ECAs and other government supported insurers. Today, our private insurers now assume part of this burden, including, perhaps counter-intuitively to some, reinsuring many of those government insurers. And of course, our CPRI market will be directly impacted by the changed economic environment brought about not just by the pandemic, but by low oil prices. Our comprehensive policies deal with default, basically regardless of cause: there are generally no exclusions of defaults and insolvencies caused by pandemics in CPRI market policies. So we are likely to see a wave of claims, just as we did in the wake of the financial crisis of 2008, and the Asian and CIS crises of 1997/98.
But these claims need to be seen in the context of the wider industry of which we are a part. While our class of business is important in supporting trade and investment globally, in the bigger financial picture of the global private insurance market, the CPRI market is small beer. The total premium income of the Berne Union membership, public and private insurers combined, across short term, medium and long term and investment insurance Committees combined, is less than 1% of the global non-life, property casualty insurance market. The aggregate exposure run by the CPRI market is in the low hundreds of USD billions – prudent within the framework of our wider industry. The insurance industry barons, who allocate capital to our sector, follow the industry norm: they only allow the underwriters in our market to make promises that they expect the industry can keep. So even if these claims were to amount to several USD billion in the aggregate (as they did in the wake of the financial crisis twelve years ago), at the wider industry level these are highly manageable amounts.
In these difficult times it is understandable that many of our clients instinctively turn to the ECAs and the government insurers. Indeed, we at BPL Global supported the re-entry of EU ECAs into writing short-term credit insurance in the so called “marketable” risk countries; we agree that ECAs should be strongly supporting their exporters and their financiers as we all emerge from the pandemic resolved to rebuild the global economy. But now is not the time for our clients to turn their backs on the private insurers. It is going to take the combined and complementary efforts of the ECAs, multinationals and the private insurers to help lift the global economy out of the predicament it finds itself in. The private insurers will be part of the solution to the challenges we now face, not part of the problem, because, generally, they will emerge from the crisis in fundamentally sound financial shape.
The pandemic will have illustrated an overarching truth: private insurers are prudent in the exposures they take on: the industry plans to keep the promises it makes. That should be reassuring for all our clients in these troubled times.
- Charles Berry, Chairman, BPL GLOBAL
Compliments of BPL Global – a member of the EACCNY.