CBI Submission to IAIS: Impact of COVID-19 on the Insurance Sector

The International Association of Insurance Supervisors (IAIS) has requested feedback on the impact of COVID-19 on the insurance sector. The Centers for Better Insurance has provided the following responses.

Photo by Dmitrij Paskevic on Unsplash

1. How will Covid-19 affect the financial system and the insurance sector specifically over the short, medium and longer term?

COVID-19 has brought to the surface the unsettling reality that the insurance sector does not — and perhaps cannot — help households, businesses, nonprofits, and local governments manage some of the most devastating and disruptive risks of loss they currently face.

Today, much of the property and associated economic value most in need of protection from loss are intangible, digital, and transitory. The exposures most threatening to that property and economic value originate from risks to infrastructure, connectivity, and persistence. Moreover, many of the 20th century conventions underlying liability and compensation regimes associated with commerce, employment, privacy, transportation, and communication are upended.

Yet, the standard insurance coverages protecting today’s policyholders remain little changed since before the introduction of the internet. If anything, standard coverages have narrowed over the last 30 years through exclusions and defensive limitations as the insurance sector has identified emerging areas of “uninsurability” in the modern economy.

Ironically, it is not one of these new exposures now highlighting the mismatch between the risks policyholders face and the risks against which the insurance sector offers protection. It is an exposure predating the legendary origin stories of insurance itself.

In the immediate term, the insurance sector will defend the actions it took more than a decade ago intended to remove the pandemic risk from the scope of insurance solutions on offer. In the intermediate term the insurance sector will reinforce these defenses and redirect those in need of pandemic risk management solutions toward government and other financial sectors. In the longer term, stakeholders will question whether the insurance sector remains relevant.

2. What are the key trends, risks, and opportunities for the insurance sector in light of Covid-19?

Continued relevancy is the most significant risk to and opportunity for the insurance sector. A worrisome trend is the emphasis on the supposed limitations of the insurance sector while implicitly or even expressly inviting the government, banking, and investment sectors to step into the resulting void.

For example, the United States Congress turned to the banking sector to administer a $659 billion program delivering 8 weeks of what is essentially scaled-down business interruption coverage to small businesses. The Paycheck Protection Program became law March 27. Banks has the infrastructure in place to accept applications a week later. Within the next 2 weeks, 5000 lenders had processed 1.7 million loans worth $342 billion. There has been criticism of the program and its administration, for sure, but it cannot be denied the banks stepped up in a time of crisis and delivered.

As we look forward to management of future pandemic risk, much energy seems devoted to building the case for risk spreading through exclusively (or almost exclusively) public mechanisms. While the scale of the pandemic risk undoubtedly dwarfs the financial capacity of the insurance sector, the vigor and conviction with which the supposed superiority of public solutions has been proclaimed could lead policymakers to wonder: Why stop with the pandemic risk? Why couldn’t these purported advantages of public risk-spreading could be brought to traditional insurance risks as well?

3. What does this mean for supervisors?

Insurance supervisors should accept three interconnected objectives underlying their supervision of the insurance sector:

· Relevancy

· Solvency

· Consumer Protection

The one and only purpose of the insurance sector is to support society in managing risks of loss. Should the insurance sector become irrelevant to the actual risks of loss facing households, businesses, nonprofits and local governments, the need for solvency and consumer protection supervision quickly falls away. Accordingly, supervisors must regularly and rigorously challenge the relevance and effectiveness of the products and services available from the insurance sector vis-à-vis the risks of loss actually in need of risk management solutions.

If supervisors identify key risks for which the insurance sector cannot (or will not) provide effective, affordable, and efficient solutions, they must make those gaps known broadly to stakeholders and clear the way for other sectors to develop and distribute appropriate solutions.

COVID-19 is an unfortunate example of how the system should not work. The World Economic Forum’s Global Risk Report in 2006 profiled four “key risk scenarios” one of which was a global pandemic. The report offered the reassuring conclusion: “The longer it takes for a pandemic to emerge — as long as we maintain awareness of the risk — the better prepared we are likely to be.” The annual Global Risk Report has included pandemic as a risk nearly every year since.

How did the insurance sector prepare? It began attaching pandemic exclusions within 6 months after the release of the WEF’s 2006 report. As the Insurance Services Office explained when it filed what has become the U.S. standard “Exclusion of Loss Due to Virus or Bacteria” in July that year: “While property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.”

The widespread introduction of virus or pandemic exclusions may have been exactly the appropriate response from the standpoint of insurance companies and their solvency supervisors. However, we now know despite a 15-year warning society’s management of the risk of loss from pandemic fell tragically short. Someone probably should have felt responsible to ask: If the insurance industry has stepped away from this global key risk, what happens if we have a pandemic?

If that question had been asked it certainly was not answered. Instead, we are where we now are — wrestling with how to finance massive losses during an ongoing pandemic while scrambling for ideas about how to manage the risk of loss from future pandemics.

It may not be the role of insurance supervisors to solve the world’s risk management challenges, but the COVID-19 experience suggests insurance supervisors are uniquely positioned to aggressively flag for policymakers and other stakeholders when the industry it supervises has backed away from a key global risk.

4. What are the main areas you will be focusing on over the coming 1 to 2 years?

Over the next few years, we will continue to focus on educating stakeholders about the insurance sector’s role, capabilities, and products as they relate to public policy, regulation, and supervision. A logical next step in that effort is to work through the insurance industry’s role in offering society solutions with respect to the other risks catalogued in the WEF’s 2006 Global Risks Report including:

· Failure of the electrical grid

· Failure of the internet

· Attack on IT infrastructure

· Privacy

· Terrorism

5. Where do you believe IAIS should focus its work during this period?

The IAIS and its members must (a) challenge the insurance sector to redefine its products and services to ensure long-term relevance to the actual risk management needs of modern society; and (b) construct the regulatory and supervisory frameworks necessary to facilitate the insurance sector to develop, distribute and deliver on the promise of those redefined products and services.

To the extent it is unable to achieve those objectives for one or more of the key risks facing society, the IAIS and its members must educate stakeholders about the insurance sector’s actual perimeter of relevance and facilitate the expansion of non-insurance and public risk management solutions to fill the resulting gaps.