The report provides an overall estimate of the potential COVID-19 insured losses across a range of pandemic scenarios1, with loss estimates provided for those general insurance classes that Willis Towers Watson expects to be adversely affected by COVID-19.
These include US and UK business interruption, contingency, US Directors & Officers, US employment practices, liability, US general liability, US mortgage, trade credit and surety and US workers compensation.
• “Optimistic” scenario (return to “pre-COVID-19” state following 3 months of social distancing): Willis Towers Watson estimate there could be $11 billion in COVID-19 insured losses within these selected lines and geographies.
• “Moderate”2 scenario (gradual return to “pre-COVID-19” state following 6 months of social distancing): Willis Towers Watson estimate $32 billion in COVID-19 insured losses within these selected lines and geographies3.
• “Severe”4 scenario (health impact approaching the scale of the 1918 flu pandemic): Willis Towers Watson estimate $80 billion in COVID-19 insured losses for the same lines and geographies.
Alice Underwood, global leader, Insurance Consulting and Technology, Willis Towers Watson, said: “Beyond its devastating human cost, the COVID-19 pandemic has swiftly upended economic activity around the world. At this point, it appears that the industrywide 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.”
The UK insurance industry, for example, has already started discussions with Pool Re, the UK government backed terrorism reinsurance pooling arrangement to provide pandemic cover. Similarly, the French government has set up a working group to investigate how insurance for black swan events can be provided in the future.
This highlights how governments are looking to the insurance industry to help provide both expertise in this difficult circumstance as well as future risk transfer mechanisms. The report also estimates the potential offset effect on US and UK motor classes. Where an insurer has a large motor book, especially in the US, it is expected that social distancing policies, which reduce the total number of miles driven, will mean a material drop in incurred claims. This will enable significant premium rebates, which Willis Towers Watson also estimates in the various scenarios.
Christopher Bozman, senior director, Willis Towers Watson, 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.
” Portfolio management is an area of increasing focus, where top-quartile organisations manage their portfolios by engaging in forward-looking management, not just reacting post-event. According to Willis Towers Watson, events such as COVID-19 further reinforce the need for effective portfolio management.
Richard Clarkson, head of London market consulting, Willis Towers Watson, said: “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.”
1The scenarios used are based on epidemiological models developed by our Life Insurance experts and informed by the latest mortality information. Each scenario includes the assumed duration of social distancing and an estimate of the economic impact; including forecasts of the length of the resulting economic recession and timeframes on how long GDP will take to recover to “pre-COVID” levels.
2 Social distancing and lockdowns help to reduce the spread of COVID-19 gradually over a period of 6 months, until both medical advancements and long term societal improvements in transmission reduction, such as through improved hygiene, are able to keep new infections at a low level.
3 It is reasonable to assume that different countries will experience differing levels of disruption, and the report’s scenario approach creates a framework for (re)insurers to work within.
4 Similar to the ‘Moderate’ scenario, except that mitigative actions are slower and less effective. Lockdowns are in place at varying levels of severity for most of 2020, as governments attempt to balance mitigation of economic damage with the ability for healthcare systems to manage severe infections. The result is a global spread which approaches the scale of the 1918 flu pandemic.
Full COVID-19 Financial Impact Report:
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