Under a severe scenario, COVID-19 insurance and reinsurance industry losses for key classes of business in the U.S. and the UK (including the London Market) could be at least $80 billion, according to a report from Willis Towers Watson’s (WTW) Insurance Consulting and Technology business.
The report is the first to offer an initial estimate of the uncertain and potentially vast financial impact of COVID-19 to the property / casualty sector, providing an overall estimate of the potential insured losses across numerous pandemic scenarios.
The estimates provided cover general insurance lines of business that insurance and reinsurance broker WTW believes will be adversely impacted by the current crisis. These include U.S. and UK business interruption classes, contingency, US D&O, US employment practices, liability, US general liability, US mortgage, trade credit and surety, and US workers comp.
The report details three different pandemic scenarios. The first is an optimistic scenario, which assumes a return to pre-COVID-19 conditions after three months of social distancing. Under this scenario, WTW estimates that insured losses could reach $11 billion within the above-mentioned lines and geographies.
Under a moderate pandemic scenario, which assumes a gradual return to a pre-COVID-19 state after six months of social distancing, the re/insurance brokerage estimates COVID-19 insured losses of $32 billion within these lines and geographies.
Thirdly, WTW’s report explores a severe pandemic scenario, which assumes a health impact approaching the scale of the 1918 flu pandemic. Under this scenario, the broker estimates insured losses from COVID-19 across these lines and geographies of as much as $80 billion.
The new COVID-19 impact report also examines a more extreme, or limited success scenario, which assumes strong mitigating actions for three months with some success but a lifting of controls that leads to another significant outbreak. Under the limited success scenario, which is somewhat of an outlier, WTW puts the insured losses from COVID-19 at $140 billion for these regions and classes.
“Beyond its devastating human cost, the COVID-19 pandemic has swiftly upended economic activity around the world. At this point, it appears that the industry- wide level of general insurance loss could exceed that resulting from the 2001 World Trade Centre event. Given the potential scale and systemic nature of pandemic loss, discussions about the need for some sort of government backstop to address future pandemic risk have already begun,” said Alice Underwood, global leader, Insurance Consulting and Technology, WTW.
The report highlights efforts in the UK and France to establish government-backed reinsurance schemes to provide pandemic cover and examine risk pooling mechanisms for black swan events in the future.
As the pandemic has unfolded, it’s become increasingly clear that no one party can tackle this alone, and public-private partnerships are seen as vital to addressing the current crisis and future pandemics.
Additionally, the report highlights a potential positive for US and UK motor lines, with social distancing and lockdown measures reducing the amount of cars on the road, miles being driven, and ultimately accident frequency – leading to an expected substantial reduction in claims. According to WTW, this will enable significant premium rebates, which the firm also estimates within its pandemic scenarios.
Christopher Bozman, senior director, WTW, said: “Based on our “Moderate” scenario, we estimate a potential drop in US personal auto losses of $40 billion relative to expectations going into 2020. However, premium rebates given by auto insurers already may exceed $10 billion and could continue to grow. The ultimate extent of rebates is highly uncertain and will depend on insurers’ reactions to emerging data related to frequency reductions.”
WTW also states that events like COVID-19 further reinforce the need for effective portfolio management, and explains that this is an area of increasing focus for companies.
“With the world heading towards a recession, the length of which in our scenarios ranges between six months and three years – with falling payroll, GDP, global trade and travel – it has never been more important for insurers to perform a strategic assessment of their portfolios. Expected reductions in premium income opportunities, combined with changing risk profiles, will challenge any insurer’s pre-COVID 19 business plans. We see strategic portfolio management as a major area of focus to achieve adequate returns, and indeed profitable growth, over the next three years,” said Richard Clarkson, head of London market consulting, WTW.