During the last couple of months, the insurance sector has been overwhelmed with enquiries related to the Covid-19 pandemic. Brokers and insurers have been flooded with calls on whether the national lockdown and the subsequent business interruption would be covered. It is not specific to South Africa only and the impact on the insurance market worldwide is yet to be determined. We have seen negative comments in the press that highlighted the fact that insurers did not respond to any business interruption claims due to the national lockdown.
The intention of this article is not to discuss whether there is or should be cover for the outbreak, but rather to look forward and ask whether this type of cover is something that insurers need to offer in the future? It is a well-known fact that outbreak-related risks are occurring more frequently, maybe sometimes on a smaller scale than the Covid-19 outbreak, but they do occur, and it is also relatively safe to say that it will occur in the future.
The basics of launching a new product
We will normally look at historical patterns when we are required to launch a new product. The minimum information required to launch such a product is to ask the following questions:
- What has happened to create a requirement for this product?
- How often did it or will it occur?
- What is the possibility of it happening again?
- What was the quantifiable loss, or can we conservatively quantify any future loss?
After obtaining this information we look at the possible market and how many customers we might attract with the launch of the product. After this is done, we can then determine the premium required and create various models of what we should charge per customer band to sell the product profitably. The above is probably an over simplified illustration of the new product process but although much more thinking and calculations go into the process, the above is a simple guideline to achieve an outcome.
The requirement for cover
The above process illustrates exactly what is lacking in terms of outbreak-related covers. The Covid-19 pandemic is really the first outbreak-related virus that has had such a worldwide impact in recent times. There is no means of calculating the possible loss at the moment. We fully understand that there is a requirement for some type of insurance cover, but where do you start and where do you stop? Most countries in the world implemented strict lockdown periods in which very little or no trade occurred. Would a lockdown scenario be covered? Depending on a particular policy wording, it may be argued that the proximate cause for the lockdown was the virus but this may result in the cover afforded being too wide as an interpretation may lend itself to any type of state enforced action being covered. . This could lead to various problems as evacuations due to a possible storm or phenomenon must then also be covered, whether it happens or not.
How often did it or will it occur, and will it occur again?
Another question to carefully consider is how often did it happen, and will it happen again? Based on historical data we can provide a fair prediction on the number of hurricanes that North America will encounter per season, or the number of veld fires the Eastern Free State and the Western Cape will have per season. We might have some worse and some better years, but we still have a reasonable expectation of when and where we are exposed. With outbreak-related perils there is no season, no way of knowing when or how or where. If these variables are not known, or are difficult to predict, how then do we create a product and / or pricing model?
We can be almost certain that it will happen again, but the question is whether it will be worse or not. Will it be flu related or will it have a different origin? It will still be outbreak-related, but the variances are so massive that it is extremely difficult to know exactly what to include in the cover and what limits of indemnity to offer.
What is the past quantifiable loss, and can we predict any future loss?
Various articles have highlighted the concern insurance companies are facing over Covid-19 related losses. International reinsurers, exposed worldwide, are anxiously awaiting the outcome of certain legal processes to begin to estimate their possible exposure. Currently there is no indication of what the possible impact on the insurance market will be. In some instances, where cover was included, it is relatively straight forward to estimate the possible exposure. This is more applicable to product offerings within the Hospitality industry which include particularly defined cover which may extend (wholly or partially) to provide indemnity for outbreak-related losses..
How also then do we predict future losses if there is no history to model upon and if there is such uncertainty of what we will cover and how often this peril will occur? It is close to impossible!
Do we now begin to offer outbreak-related cover?
There is currently a massive demand for some type of cover for outbreak-related perils. We cannot argue the fact that this will greatly assist in reducing public confusion as well as offer a product for which there is a great demand.
The fact that the cover required is in demand unfortunately does not eliminate the facts mentioned above. The need for a product does not simply create the product. Careful calculations and consideration must go into the planning, the pricing and the perils offered, or insurers and reinsurers alike will face catastrophic financial results.
The general opinion is currently that this is almost akin to an un-insurable peril simply due to the many unknown eventualities. Where do we limit our exposure? Do we only cover certain outbreaks? Do we offer extended cover to include governmental forced lockdowns? Will we be able to price the product to such an extent that it can offer indemnity without causing massive losses for our industry and force players into non-existence, while still achieving affordability for our clients?
The need for cover has been highlighted but whether a product will be offered soon remains elusive until at least some of the above-mentioned questions can be answered.
CIB, Head of Underwriting