Ben Telfer: 

Hello, everyone. I hope you’re all well, and welcome to today’s ICMIF webinar, looking at the insurance and reinsurance implications of the coronavirus pandemic. I’m very pleased to be joined by three expert speakers today on today’s webinar from RMS and also Willis Re, who are one of ICMIF’s long-standing Supporting Members. So today we’re going to be joined by Robert Muir-Wood, who is Chief Research Officer at RMS; Tim Edwards, who’s head of Catastrophe Analytics at Willis Re; and Dave Ingram, who is head of Willis Re ERM Advisory. So firstly, I’d like to hand over to Robert. Robert, welcome and thank you for joining us today. 

Robert Muir-Wood: 

Thank you and welcome everyone. So, we are planning to take on this difficult task today to explore the insurance implications of the COVID-19 catastrophe. There are three of us, the original idea was we might be sitting on stools alongside each other. We want to make this a bit conversational in approach, so we’ll see how it goes. You’ll have to imagine us sitting on those stools. And just to make the point that, actually, we are going to be talking at a high level here because there are many issues. 

The event is very, very much still going on. We have not by any means seen the beginning of the end of it, and so we can only talk in generalities. If you have very specific questions on wordings, then you may need to take them outside this particular session and approach Tim Edwards, for example, for more detailed response. So I want to pass this on now just to actually, well, first of all, have a look at the agenda here. I mean, we’re looking at the insurance and reinsurance implications. And this is some background to the three of us which you can read at your leisure maybe after this session is over. This is our agenda. 

We’re going to talk about the specific classes which are likely to be most impacted, how we might rank them. We’re going to focus on a few lines of business which we think are likely to be most impacted, we’re going to talk about the overall market impact, the bigger picture perspective as to insurance functioning in the economy, insurance functioning through the rest of 2020, and then last of all, consider the question as to, what is the protection gap in this area? And actually, how potentially could it be filled? So I’m going to now pass over to Tim to talk us through some perspective on the classes to be impacted

Tim Edwards: 

Thank you. Good afternoon and good morning, everyone. I mean the global insurance industry, like all industries, is now grappling with the huge potential impact of COVID-19. And in real time, the situation then is extremely fluid. And so it’s in a very early stage that we list out here some, but not all, potential insurance classes most at the top and least at the bottom, in our view, exposed to the events. And within each class, we call out the major areas of exposure, although this is not exhaustive, and we make this assessments over the shorter term. So looking at liability exposures, for instance, they have the potential to develop significantly over time, and we make no effort to project these ultimate liabilities out. 

So there are some key themes and I’m going to mention three of them. Firstly, the non-diversification of the exposure, starting with contingency. This is clearly going to be a hugely impacted class driven by all major sporting and cultural events either being cancelled or postponed. It’s not like there’s one region in the world where everyone’s ticking along nicely and keeping the market and general sanity of everyone going nicely, and that’s compensating for those who have experienced a loss. This is most common with insurance. 

But despite the totality of this scenario for that class, UBS analysts exposure between seven and $8 billion, which doesn’t make it such a huge catastrophe when we look back over previous years. And 50% of that, according to UBS, is likely to be reinsured. The extent of the losses indeed of that total market as with other classes is likely to depend on policy wordings and whether communicable diseases are included as a reason for cancellation or postponement. 

Another class I would like to highlight is trade credit for its role in maintaining continuity within our society. Credit insurance responds to the non-payment of goods or services due to the protracted default or insolvency of a company. And while governments are debatably playing a role in providing economic stimuli and support for companies most impacted, credit insurers clearly also play a role here in maintaining balance sheet flexibility and may assist in loss mitigating actions to keep trade going. 

A third theme centers over the complexity of understanding coverage to pandemic risk where each class of business has its own nuances of cover and the exclusions that may vary between markets even by clients and contract. And for the purposes of reinsurance, our job as reinsurance brokers at Willis Re is to arrange reinsurances that most closely mirror the terms of the original policies written by our clients. And key then to ensuring this for our clients is the clarity over the named perils and minimizing any exclusions, ensuring that when aggregating losses for the purposes of determining an event, for instance, that these operate on the broadest space as possible for our clients’ own interests. 

So, that’s the overview. If we now skip into some specific lines of business, there’s many points I could have mentioned there but I mentioned three themes, but we do want to go into some issues here in respect of property on slide eight. So in terms of property, the coverage question is a key one and it centers over whether commercial property policies cover non-damage BI extensions. So this is loss of profits, revenue, or increased cost of working, but to where there’s been no property damage. And typically extensions then include denial of access, loss of attraction and customers and suppliers also known as CBI. And then if covered, how are these losses covered by insurers? 

They typically operate with sub-limits. And for CBI cover, that’s often lower for unnamed suppliers and for named suppliers. There may also be geographic restrictions. And we saw after the Thai floods, for instance, that the regions exposed to natural catastrophe perils may have lower limits. Also, there may be notifiable disease exclusions, and many insurers who in seeking to avoid a repeat of SARS, excluded SARS-related conditions. Others actually went further and applied additional exclusions for the family of viruses to also include the likes of coronavirus. 

There’s also this issue around concurrent perils and the example here being riots or earthquakes. So even if COVID-19 losses are excluded in that they’re not named, in practice, many losses from perils in operation will be hard to split out. Indeed, in several jurisdictions where an uninsured peril is not explicitly excluded and it cannot be separated from an insured cause of loss, the insured may be able to claim. And it’s not hard to imagine a situation with a hurricane or an earthquake, for instance, or a riot indeed that may come in combination with this period of lockdown and make it a very difficult loss to understand. 

If we go back to slide nine and look at the situation with respect to reinsurance is that the flow of determining whether reinsurances will respond starts with that understanding I’ve just gone through on the original policy and whether the loss is covered. Then within the treaty of reinsurance, if the class of business specified whether it is specified in the reinsurance contract. So for instance, CBI, is it explicitly called out as being covered? And then, does the treaty cover pandemic explicitly? Or if not, does it have any infectious disease exclusion? 

If all of these are ticks against them, then effectively, the reinsurance is likely to respond. And we see the reinsurances responding in different ways. Individual risk access treaties are designed to respond to fire and explosion. And the exposure to those treaties is we assume lower due to the underlying sub-limits and underwriting guidelines. So the potential we feel is in proportional or catastrophe treaties, where the loss may be aggregated to an occurrence in the case of a non-proportional where the specific number of hours, say 168 hours, where the insured may aggregate losses to form one occurrence. 

The question then we were grappling with is when to start the event and when to attribute loss of profits, revenue, increased cost of working. And if we say that the government decree in certain countries or the order to close business may constitute a start of an event, we may see the increase likelihood of being able to aggregate losses together where that is the case. So off note now is that renewal discussions are ongoing effectively passing a risk from one period to the next. And cognizant of this, reinsurers, for instance, are now acting to limit their exposure and we are having to act strongly in favour of our own clients’ interests in this regard. 

In terms of slide 10, the factors that may amplify or de-amplify losses. We want to call out a couple of things here I haven’t really covered. Firstly, damaged definition. This may vary by jurisdictions. Obviously, the broader the definition, the greater the recoverable, but you could easily see situations where contamination after a factory closes, for instance, maybe a loss that is attributable to a property element of damage. Coverage litigation though is the big topic as we’ve all seen in the trade press, less litigation cases and moves by state legislature to cover or rather to overturn exclusions. 

The American Property Casualty Insurance Association has said however that such moves would threaten the solvency of the entire sector. They estimate that capacity of all insurers in the US market to pay losses is roughly $800 billion. And with commercial underwriters, you write the non-damaged BI elements a fraction of that. So the potential losses if exclusions were overturned are likely to be huge. So someone estimated between $ 270 and 383 billion a month, so far larger than industry could bear. 

If you have any questions over these points, please don’t hesitate to contact us at Willis Re, myself or Dave Ingram, or your Willis account representative, and we’d be happy to discuss those in further detail. So if we move on now to slide 11, the theme here within the lines of business we want to zoom into, Dave, if we look now at life insurance, is it the case that there is lower mortality of those of working age? And is that likely to be a key factor in terms of limiting exposure? 

Dave Ingram: 

Thanks, Tim. Yes, there will be a mortality of impact but to the extent that the insurance coverages are concentrated on working adults it’ll be limited. But that’s a little bit complicated to deal with. And in fact, what we’re seeing on the aspect of mortality, we all see horrific reports of deaths from COVID-19 but a high percentage of them are coming from people who are of older ages and of already compromised health, both of which are not as prominent to a factor for working adults. 

Life insurers are also faced by a number of additional issues though, and some of these may well be larger than the actual mortality claim impact. Life insurers have to worry about counterparties, reinsures, or sometimes one of the largest counterparties. We think that’s not likely to be a huge impact on life insurers directly, and we’ll get to that a little bit later, but life insurers need to be paying attention to all of their counterparties, not just their reinsurers, any other partners they have, vendors, etc. 

A lot of my clients in the US, for instance, outsource things relating to their computer systems. So they’re either outsourcing the computers themselves or outsourcing the software that they’re running on the computers, and they’re relying on a third party to maintain those capabilities. And so life insurers need to be very diligent with those counterparties to make sure they can continue to operate their business. And a tricky issue for life insurers may have to do with reinsurance capacity. And again, we’re going to talk about the specifics of the financial impact on reinsurer soon. But the question is, what will happen going forward as insurers are looking to place new reinsurance and with the rates of reinsurance? 

And what we’re concerned with or what life insurers could be concerned with is some life insurers will, because of losses they experience or because of a change in their attitude, want to decrease their retention. And that may cause a surge in demand for life reinsurance. And it’s unclear that the reinsurance sector will want a lot more mortality risk at that time for similar reasons. So that’ll be something that we’ll have to work out as we go forward. There will be countervailing pressures as it shows at the very bottom of the slide. There may be a significant impact on sales. So the overall volumes of life insurance being written may decrease at least temporarily. So we don’t know yet how those things are going to play off against each other. 

But the biggest impact for life insurers comes from the economics in capital markets, it’s investment losses. You’ve all seen what the stock market’s doing. In addition, any credit exposures are pushing down the value of any corporate bonds or other instruments with credit risk. Not as much as the stock markets are going down, but perhaps half as much. So it’s a double whammy there as we call it in the States. And other impacts, and we’ll touch on this a little bit more in a minute is that the economy is slowing down drastically. So that will have impacts on the life insurers as well. 

Finally, operationally, you have most insurers in most countries are practicing some or all of their employees on a work from home basis. And so, hopefully, companies were ready for that and their employees all have the appropriate equipment to do that and have the appropriate connections to the internet to be able to access that and so on and so forth. But are there any issues with that? Will companies be able to do the underwriting that they normally do? Are there steps in that process that need in person interactions that won’t be happening in the near future? So all kinds of issues. 

In addition to this, you see on the liability side on the balance sheet, part of the economic in capital market impact is that interest rates have been falling and sometimes being pushed down deliberately by central banks. And that tends to affect life insurers more on the liability side than the asset side. The asset values go up with interest rates dropping usually, but the liabilities usually go up more. And in fact, some life insurers are pressured because they have minimum interest rate guarantees embedded in their products. And so in those cases, the liabilities will be affected quite severely. 

Focusing back on that mortality issue as I started to say before, the age composition of the block of business that you have is very important. What we’ve seen, particularly the studies out of the China’s experience, which is a couple months ahead of the rest of the world, in the outbreak show that mortality up through age 60 perhaps is very low from the COVID-19. At least the experience in China has been the mortality is slightly higher in the low 60s, but then by the time you get into the 70s and 80s of age, you’re getting quite significant increases to mortality from the infected population. And so if that is the case that you have exposure to those older ages, then you could have quite a significant impact. But if most of your business is with a working population, that’s not as likely. 

The other thing that’s complicated with this is that the pandemic maybe it’ll reach everywhere, and it certainly is reaching everywhere to some extent, but some countries, some locations within countries are handling the pandemic better than others. And so your actual geographic concentration in those areas that are having a worst time with the pandemic than others is going to determine your result as well. 

And if your business is with industries that have greater exposure to the pandemic, in the US we’re calling some positions to be essential. And those are people who are still working while most of people are working from home or have been laid off or made redundant, then if your concentration of business is in those industries that are actually dealing with people, then you may have greater exposure. If they’re with industries where there have been greater layoffs, you may have a greater fall off and a cancellation of your business. 

This pandemic has a lot of interesting and difficult to manage characteristics. The fact is, it seems to be as transmissible as seasonal influenza, it seems to have a four or five day incubation period where there’s never any noticeable characteristics of it. But that it is recent studies have suggested that the maximum transmission of the virus comes right before the symptoms start to develop. And then the fatality, the need for intense and prolonged care in an ICU is another difficult aspect of this. 

We don’t know yet the degree to which insured mortality is going to be lower than the overall population. That issue of the fact that a lot of the mortality is hitting people with compromised health would suggest that the insured mortality will likely be better, but we don’t know. And so that’s an issue as well. 

Tim Edwards: 

Okay, Dave. So a number of points there then on life insurance that could both amplify or de-amplify the loss, the working age and the different levels of mortality and how that may vary to the overall population and also between countries, the number of imponderables that we just don’t know at this stage. So Robert, if we can bring you in here onto employer’s liability and just to start the discussion around liability classes, we clearly see that at this point it’s highly uncertain for the liability classes. 

Robert Muir-Wood: 

Indeed, yeah. I mean, I’ve just actually come back initially to think through workers’ compensation as to how that might, well, work out to be one feature of … As Dave has mentioned, we’re still finding out some of the medical aspects of cases. And one open question is, is there a long-term damage caused? Is there a long-term injury caused to someone who’s been through an intense case of COVID-19? I mean, we’ve seen examples of breathlessness sometime after the patient has effectively recovered and we don’t know whether there is going to be some long-term injury because that will have an impact on how workers’ compensation could proceed. 

As a general rule, an illness is not a compensable if the employee is at no greater risk than the broader population. So if going to work doesn’t put you at any greater risk than the broader population, then it will be hard to make a claim. But clearly there are questions around … there are certain industries or businesses with a raised probability of employee exposure. I mean, as an example, would be aircrew on flights to countries or regions where there’s a much higher level of incidents, and then the background average, they could be considered more exposed. And I mean, if their work actually requires them to travel to a high risk areas, I mean, clearly these high risk areas are themselves changing quite rapidly with time. So traveling to Wuhan would’ve been considered as high risk area, perhaps it wouldn’t now. But actually traveling to lumber in Italy might be so considered. 

This may all apply before lockdowns went into effect, but employees required to work closely with others at greater risks. So those who have to work alongside others who have been traveling to high risk areas might themselves be considered of higher risk. I mean, there are a number of secondary factors that may affect workers’ compensation. There are undoubtedly going to be delays in any other medical treatment in emergency currently when hospitals are totally focused on responding to COVID-19. 

The good news is it looks as though workers at home seem less likely to suffer accidents than those in their work environment. Although there has been a consideration that when they do eventually return to their offices, they may have forgotten the practices and procedures to keep them safe. That is on the workers’ compensation side. 

Actually, the employer’s liability workers’ compensation statutes do not fully shield an employer if it’s possible to argue that their employer’s negligence has been a factor in someone contracting COVID-19 during work or through work related travel, and also in the situation where other members of the family that the disease spreads to them, and that could be the basis of a claim. But I mean, all of these are significantly going to come down to this question if there’s a long-term health impact of suffering a severe case of COVID-19 that would change the nature of what compensation would be appropriate. 

I just listed down at the bottom of this slide, what might be considered high risk work environments. Clearly, we’ve seen crew on cruise liners have been subject to high rates of infection, personnel working in the frontline of hospitals are clearly potentially highly exposed, aircrew on journeys to regions and country regions and cities where there’s high incidents, those who are selling tickets in open situation, check-out staff in stores, employees required to take public transport to work, and other employees work at home. So all of those could potentially be the areas where some liability might exist if there is a long-term injury to be compensated in particular. 

And lastly, we have to constantly check, or the HR departments of companies have to constantly check where are the new hotspots of risk because they keep changing. And eventually we will come out of the lockdowns that apply in a number of countries at present, and at that point, we’re going to be, obviously, very interested to know where are the hotspots of risk in that location, because they’re going to be in different places to where they’ve been seen so far. 

So in terms of litigation and liability of the public, of customers and visitors, I mean, this is a whole other area where we can see members of the plaintiff’s bar are already contemplating the potential for litigation and for liability costs to them become picked up by insurance. But the passengers on cruise liners, especially those that embarked in March when it was clear that the virus was spreading maybe there may well be litigation there. The hotel guests in hotels who weren’t informed about COVID-19 cases, the occupants of nursing homes, all areas where you could see that the potential for liability to be litigated. 

And there may be challenges for lawsuits to succeed around the proof of causation as to, was infection definitely caused as a result of this negligence? And it’s really important for businesses to escape such situations that they’ve had clear policies and have demonstrated their action in reducing exposure and risk. And lastly, directors and officers cover here, I mean, which typically follows dropping stock market valuation, triggering securities class actions. I mean, it’s obviously, a whole market has fallen here. So the question is, has a particular company suffered worse than the average of the market? And is this the function that they weren’t taking these risks seriously? 

There could be allegations of disclosure deficiencies, breaches of fiduciary duty and corporate mismanagement. And again, it’s important that firms have developed and tested their contingency plans. They can show they had business continuity plans in place to deal with all credible catastrophes, major events. And there obviously will be questions about, to what degree this particular infection should have been in some way anticipated? So I think I’ll now pass back to Tim. 

Tim Edwards: 

Yeah, thanks very much, Robert. So, we’ve looked at three specific lines of business. We could obviously talk about other ones. But just to emphasize, again, the message, if you have any specific questions, you can contact us and we can address those offline or in generic summary ones, we can do that at the end of this presentation. As we now look to the broader marketplace, so at the economic level but also the insurance sector, I’m going to invite Dave now to give his thoughts. 

Dave Ingram: 

Thanks, Tim. So, first let’s think about how COVID-19 could have impact the market. What I’ve got on the screen here. And what we’ve got here is three scenarios that are possibilities for the market, and we got these from a publication of Morgan Stanley. These are a month old, so that’s like ancient history in terms of this COVID-19, in fact, even ancient prehistory because you see there the first scenario suggests that this will just be a minor blip and we’ll go back to doing regular stuff by the end of the second quarter. Morgan Stanley, since this time, a month ago, has updated their baseline projection and they think now that a full recession is the expected scenario and it’s just a question of how bad that recession will be. 

In fact, if you look at what a lot of other banks are saying, we looked at a dozen of them, and their estimates for the first quarter GDP go as low as a 10% drop in GDP. That’s huge. Two, looking at the second quarter, the range of these 10 banks is anywhere between an 8.5% additional drop in the second quarter to a 30% drop in the second quarter. You’re talking depression territory there. So the idea is that the marketplace, the general level of business activity is going to be drastically affected as much by the actions that are required to be taken in terms of shutting down a lot of business activity. 

And in addition, there, if you look at projections that these same banks had of unemployment looking at this in terms of US unemployment, again, looking at anywhere from 5 1/2 to 13% unemployment projection. And yesterday or the day before, one of the US central bank offices published a study looking at unemployment possibilities. And again, they’re saying that the worst case scenario could be as high as 30% unemployment, which again is totally depression levels of activity there. And we think you need to think about a range of possibilities here because we really don’t know, this is new territory for all of us. And I think I alluded earlier to the severity of the pandemic itself, there’ll be a range of scenarios you need to think about as well. 

One of the other things that you’re going to have to deal with is questions. Here’s four questions that AM Best has put out, the rating agency has put out into the insurance marketplace and is looking for answers to these soon. But you’re also going to get questions from your board, from your top management, from your customers, from your employees. So you need to have a script that you’re going to work from so that the stories to all of these audiences are coherent and similar. 

Another example of questioning is from the regulators. One email I got this morning told me that in Denmark, the supervisor of the insurance sector wants a weekly report including the results of stress tests on equity and interest rates, and wants to know about life insurance policies with and without guarantees in Denmark. So, just another example. 

Looking at the questions here from AM Best, you see they ask about impact on operations, they want to know, had you done any stress scenarios on this? And what are you looking at now in terms of, what do you think your 2020 financial projections would look like? And then finally, what changes are you making in your plans, in your assumptions, and in your stress testing? So a lot of questions and none of us really have answers, definitive single answers. So that’s why that idea of multiple scenarios is so important. 

Now, when thinking about how COVID-19 affects the market alluded earlier to the effect on reinsurers, we’ve done an extensive study of that. Here’s one part of that study. Here, we looked at 18 reinsurers and we plotted on this graph their exposure because of their holdings of equities and credit risk. And we compared that to their shareholders equity along the horizontal axis. And on the vertical axis, we looked at their rating. And you see that the vast majority of this group is in that upper left quadrant, which is the strongest. They have lower amount of risky assets, and they have higher ratings. 

A very small number of some of the largest insurers are in that upper right quadrant who have riskier investment portfolios but still have very high ratings. And another small group has less risky investment portfolios and ratings that are getting towards the lower end for reinsurers. But the good news is that we didn’t find anybody in that lower right quadrant of reinsurers with a riskier portfolio and lower ratings. 

So we think that when we look forward, it looks like reinsurers could suffer a loss. Again, this is one of many scenarios that could suffer a loss of as much as 110 billion pretax. We made no effort to try and estimate everybody’s tax impact there which would be, again, pretax, a 20% hit on reinsured capital. That’s the bad news. The good news is that the reinsurers all had a cushion that was in excess of 20% there. So we don’t necessarily see any reinsurers that should be calm at least in this group of large international reinsurers. But we don’t know about the specific business concentrations of the reinsurers and how those would be impacted, but looking at just the investment part

Tim Edwards: 

Yeah, thanks very much, Dave. So that’s quite stark, isn’t it? In terms of looking at the potential market impact? I mean, if we look to wrap this discussion up and move it forward to how we, as an industry, might want to consider a response, can I ask a question, Robert? I mean, we’ve obviously talked about this, to what extent do you feel insurance can play a role? And what are the peculiarities of pandemic as a risk that there may be such an acute challenge? 

Robert Muir-Wood: 

Yeah, I mean, I’ve had conversations with a number of people, especially from the reinsurance sector over the past few weeks. And as a modelling organization, we have modelled pandemic in the past and we’ve raised the whole question of looking at what happens to other lines of business beyond life and health in a pandemic. So there has not been much appetite to write pandemic related business in the past and for quite a good reason, which is that insurance is all about diversifying risk. I mean, the whole reason you transfer risk to some other party is that they can diversify more effectively than you can. 

ut with pandemic, it’s very hard to think, how do you diversify? As we’ve seen, it could affect the whole world, it affects stock markets and the global economy. So you haven’t got an investment in insurance diversification that you can … The actions taken by one country, I mean, cannot always be contained from other countries near and far. And so it would be a huge challenge. And clearly insurers and the insurance sector is talking about a pandemic pool present, but I’m slightly sceptical as to how this would work, because we would need to accumulate. 

If we said the cost of COVID-19 is $5 trillion in OECD countries, and it’s almost certainly going to be more than that, and if we assume that is a 1% annual probability event, we would need to accumulate $50 billion annual contribution towards raising a $5 trillion fund. And it would need to be invested in something which is uncorrelated with the economic impacts of a pandemic, which is … Yeah, that’s a good speculative activity to try and think what asset class is completely uncorrelated with the economy other than shorting the equity markets, but anyway. So I feel that only a government can accomplish this as we are seeing. I don’t think, myself, that there is an insurance pooling solution here. 

Tim Edwards: 

Clearly, key points. I mean if we look now for some of the early conclusions, I mean, it is early days, but Robert, do you want to summarize here for us? 

Robert Muir-Wood: 

Well, I mean, we’ve covered a number of perspectives on this and we’ve covered how you would rank these different classes of business. And I think, you rank them a bit differently if you’re thinking over short term impacts and long-term impacts and claims versus the total losses. But this, I think, is a very good perspective. The focus on line of business, I mean, in particular, as Tim had already mentioned, the situation in the UK, the government has supported companies that are specifically impacted by the closure to such a degree that actually there is not so much clamouring, I think, for asking that business interruption should be paying out. In addition, the government has closed that one a bit. 

But in the US, it’s very much an open issue. And we’re seeing these bills being drafted or being threatened to be drafted in a number of States in New Jersey, in Massachusetts, in Ohio. We’ve seen some litigation started in tribal casinos in Oklahoma, in restaurant chains in New Orleans, in California. And they’re probing at the idea of trying to get rid of the exclusion clause, which would clearly be absolutely momentous thing to do to be able to alter a legal contract in that way, for which no revenue or no money has been actually collected. 

So, I mean, it’s not quite clear where this will be, but it clearly requires some action, some initiative, some leadership from the insurance sector to do something to appease the sense that actually in this most extraordinary of catastrophes, that insurance is not really providing adequate levels of support. And then we come to us, we just discussed the pooling arrangements and actually whether there’s an opportunity there. 

I think for the insurance sector, these are quite difficult times in particular because at present, it may not be participating to the degree that people think should be appropriate. And so I think that a lot of questions will be asked around that. So Tim, I don’t know if you want to draw all these threads together and summarize or we can move on to questions. 

Tim Edwards: 

Yeah, I think that’s a great summary. Should we open up now to questions that may have come in? 

Ben Telfer: 

Yes, that’s a great idea, Tim. We‘ve got a few questions in. Our first question, are we likely to see a wave of mortgage default through rise in unemployment? 

Robert Muir-Wood: 

David, I don’t know if you could take this one. I think this is more of a US question than the UK. There has been a mortgage payment holiday identified in the UK for at least the first three months, which I guess if this continues, has the potential to be extended to six months, but I’m not sure of the US situation. 

Dave Ingram: 

Yeah, in the US, the government bill that was passed the other day did have a moratorium in it on foreclosures and evictions. But I don’t know offhand what it actually did with the payment requirements as to whether there was any relief there or just a relief from the seizure of the property, which I think may be all that was done there. So, certainly, if you’re talking about unemployment on the scale that some of those numbers that I said before were happening, it’s going to flow through to mortgages because as we learned in a decade ago with the financial crisis, the mortgages are really primarily a derivative on the incomes of the general population. 

Ben Telfer: 

Another question: aAfter the recent financial crisis, it took almost eight years for the financial markets return to pre-2007 levels. Do you anticipate that this would happen again with the COVID economic crash or do you think we will return to the same levels that we saw in January a lot quicker?” 

Tim Edwards: 

Absolutely. 

Dave Ingram: 

So, what you can see looking at prior downturns was that in very large market hits such as what we’re seeing so far, it is taking, on the average over history, three or four years to recover. I think the big issue that we’re going to have to pay attention to is the degree to which there is a demand destruction and that’s just an economic term for the fact of people not having the ability to spend money because they don’t have it, and that’s what the government support programs are supposed to fix. And hopefully they will do a significant enough job to fix it that the economy will get into a virtuous cycle of recovery. 

The issue becomes, if in addition to the economic effects there’s a psychological effect, and so people become unwilling to spend as much money as they were spending, then there’ll be a demand reduction because of that. And that’s something that we’ll have to watch out for which may extend that recovery beyond a couple of years. 

Tim Edwards: 

I mean, clearly, if we look at the insurance sector, I mean, you could see that some of these specialists insurance classes are going to take some time to get back up and running with levels of capitalization. And if we look at contingency, for instance, that could mean that the insurability of events is going to be on the question for some time now, and that the increased cost of actually getting insurance is likely to make it a challenge to put these events on for at least the first few months. 

But you do come back to the sense that insurance is a non-correlating risk. In normal times, when we do get back to normal, it will attract a lot of investors in given the non-correlating risks, but also potentially some of the attractive rating environment that will ensue. 

Robert Muir-Wood: 

And I was just going to say, I mean, I think a lot hangs on clearly how rapidly the situation recovers. And we are all going through this first phase, the main wave of cases right now under lockdown. I mean, the cases will come down in two months or so and there’ll be an attempt as in China to try and get past lockdown and it’ll require very comprehensive tracing of individuals in cases in order to sustain that. 

It’s going to have to be some loss of liberty and the government is going to want to track everybody all the time. And there’ll be protests around that, and we’re not quite sure how that will work. But, I mean, in order to get through to this next phase of this whole catastrophe until eventually a vaccine becomes available, I mean, this next phase is new territory and how we navigate it will determine how rapidly the economy can get back up and running again. 

Ben Telfer: 

Thank you, Robert. You spoke about the first phase of suppressing the peak of infection, how much of business do you think will be back to work at the end of this first phase? 

Robert Muir-Wood: 

Well, I mean, I think I’ve almost covered that, but there’s going to be huge desire of countries to get business up, back and running. And the question is, what toleration there is in positions on people’s liberty and personal information? I think we haven’t started talking about what that’s going to look like yet. And I mean, we can see in China very much our future, potentially. If you look at what is happening in Beijing today, that potentially is what will be happening in New York and London in three months’ time. 

Ben Telfer: 

I’ve got another question here. And Robert, I think you alluded to about the reputational damage to the insurance industry. And the question is, what will happen to consumer confidence in insurance due to not paying claims on things like travel insurance and the various exclusions to pandemics? 

Robert Muir-Wood: 

I think it’s important that the insurance industry does show some leadership and generosity in certain areas, I mean, beyond the terms of the contract in order to try and prevent that happening.  I think there has been so much talk about the protection gap in the last few years, and clearly after SARS, in a sense, the protection gap was widened by clauses added to contracts. Since that time and we find the situation where probably insurance is going to pay out quite a small element of the total cost. 

In a way, in order to be successful in insurance in any situation or catastrophe, it ought to be pitching in and contributing. And clearly it should be raising premium to pay for its coverages, but I think it is an important feature of its reputation that it is themed to be a contributing appropriately. 

Ben Telfer: 

Tim, Dave, anything to add onto that question? 

Dave Ingram: 

I was just going to say real quickly that I just want to second some of the comments about the insurance industry thinking of how to contribute here that certainly commercial insurers have to be particularly concerned with the short term impact on their customers and how that’s going to affect their business and thinking of ways that they can be part of the solution to the problem. I’ve heard a story out of China that the insurance industry there has responded and that 500 new products are being developed for offering there. 

Ben Telfer: 

Tim, have you anything to add on Dave and Robert’s comments there? 

Tim Edwards: 

No, no. I don’t think so. I think, that’s it. I wouldn’t add anything to what’s been discussed. Very good comments. Yeah. Clearly, not something that the sector has been preparing for. 

Ben Telfer: 

No, exactly. Anyway, thank you so much, Robert, Tim, and Dave for participating in today’s webinar. As Tim mentioned before, if you do have any further questions or questions that go into a lot more detail, please get in touch with any of the speakers or get in touch with ICMIF, and we’ll be happy to pass your questions on. Before I leave you, you may have seen already that Robert and Tim wrote a recent ICMIF blog on this very topic, and you can access that from the ICMIF website. And also ICMIF is publishing regular updates on our news website and also via social media on what ICMIF members are doing to respond to the COVID / coronavirus pandemic, So please check those out.  

A final thanks to Robert, Tim, and Dave for joining us today and for everyone else, and hope you remain safe and healthy during this period. Goodbye and enjoy the rest of your day. 

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