Insurance Europe Annual Report 2020-2021

Pandemic resilience

THE CHALLENGES

What are the lessons to be learned from the first global pandemic in a century?

WHAT INSURERS CAN DO ... AND WHAT THEY CAN'T

WHAT POLICYMAKERS SHOULD DO

THE CHALLENGES

WHAT INSURERS CAN DO ... AND WHAT THEY CAN'T

WHAT POLICYMAKERS SHOULD DO

THE CHALLENGES

Eighteen months on from the first reported case of COVID-19 in Europe and life on the continent is still far from normal. The challenges presented by the pandemic need little introduction. COVID-19 has devastated societies and economies the world over, leaving no sector untouched.

It is that size and breadth that makes pandemic risk different from other catastrophes. Whether natural or man-made, other catastrophic risks do not usually hit the entire world at once. And in the case of COVID-19 the economic losses have arisen not only from the pandemic itself but also from the government actions that have mitigated the impact of the virus but exacerbated its economic effects.

Businesses across OECD countries faced an estimated $1.7trn in revenue losses for one month of strict lockdown measures.

By comparison, the largest economic loss from a single event since at least 1970, the earthquake that hit the east of Japan in 2011, resulted in $234bn of losses.

(OECD, March 2021)

At the same time, COVID-19 has exposed massive protection gaps in the area of business continuity risk. The Geneva Association calculated in October 2020 that less than 1% of an estimated $4.5trn of global pandemic-induced GDP loss for 2020 will be covered by business interruption insurance.

It has also exposed the mismatch between pandemic-related economic losses and the risk-taking capacity of insurers. With annual business interruption insurance premiums of about $30bn, insurers would have to collect premiums for 150 years to cover the global output loss in 2020, according to the Geneva Association.

The COVID-19 pandemic also brought into the spotlight other areas in which resilience needs to be strengthened. Research by Bruegel published in July 2020 found that one in three EU households were unable to meet an unexpected financial shock even during regular times. And Interpol said in August 2020 that 59% of its member countries reported COVID-19-related phishing and other scams and frauds. Individuals and businesses therefore need greater resilience to cope with inevitable future pandemics. And greater public awareness and management of digital and cyber risks is needed.

“One in three EU households were unable to meet an unexpected financial shock even during regular times.”

THE CHALLENGES

WHAT INSURERS CAN DO ... AND WHAT THEY CAN'T

WHAT POLICYMAKERS SHOULD DO

WHAT INSURERS CAN DO ... AND WHAT THEY CAN'T

Insurability

Pandemic risk challenges the principles of insurability, but with significant differences depending on the area. Insurance for life- and health-related pandemic risks, for instance, is generally widely available and affordable, as the risks are not systemic and data is available that allows life and health insurers to model pandemic risk and price it accordingly. The Geneva Association expects underwriting losses for life insurers from COVID-19 to be significant but manageable and believes that pandemic risk poses “no fundamental insurability challenges” for health insurers (Geneva Association, October 2020).

On the other hand, as outlined above, the very nature of pandemics makes pandemic-related business interruption risks uninsurable by the property and casualty industry.

The issue here lies not just in the magnitude of the losses but in their global nature; risks that materialise everywhere and all at once prevent the diversification and pooling mechanisms that lie at the heart of the private insurance business model. This is why business interruption policies tend to only cover losses associated with physical damage. When non-physical loss is also covered, pandemic risk is usually excluded, with only limited cover offered to small numbers of policyholders in well-defined circumstances. Another difficulty is the fact that business interruptions are linked to government decisions, which cannot be foreseen.

Indeed, for a risk to be insurable a number of conditions need to be met. First and foremost, it must be possible to build a pool in which the risk can be shared and diversified at economically fair terms on the basis of which premiums can be calculated at affordable prices. The risk must also be definable, financially measurable and random, and there must be a reasonable large claims history and source of data from which to calculate the likelihood of the risk occurring. COVID-19 does not meet any of these criteria.

Contract clarity

What has become clear as a result of the COVID-19 pandemic is that, in a number of markets or cases, there is some form of misunderstanding about insurance; firstly, about the basic principles of how insurance works by spreading the losses of the few among the unaffected many, as outlined above, and, secondly, about the cover provided by individual policies. The insurers and reinsurers concerned are therefore reviewing their contracts to ensure absolute clarity over what is and is not covered under their policies.

Cover for related risks

In terms of reducing financial fragility and improving digital and cyber resilience, insurers continue to offer long-term savings and retirement income products and provide risk management advice and insurance policies to cover the risks of greater online interactions by businesses and individuals.

Risk expertise

Understanding and acknowledging the insurability challenges must be the point of departure for any discussion of solutions for covering the risks of future pandemics. There is an emerging consensus around the fact that if insurers are to play a role, it will be one of collaboration with governments, with the latter assuming the majority of the losses.

Nevertheless, beyond the financial aspects, the insurance industry can draw on a long history of risk management, as well as established claims-handling procedures and channels of communication with policyholders. The sector has extensive experience in addressing protection gaps for risks such as terrorism or natural catastrophes through public-private partnerships with national governments in many EU countries and beyond. Whether there is scope for a role beyond the purely administrative and advisory — in assuming a portion of the losses — remains to be seen. However, there is no doubt that the industry has a part to play when it comes to increasing pandemic resilience, and is keen to play that part.

At European level, Insurance Europe is involved in discussions on future pandemic risk solutions, notably by taking part in a workstream organised by the European Insurance and Occupational Pensions Authority to explore the options for and feasibility of shared resilience solutions.

COVID-19: the insurance sector's response

“The maximum possible loss from certain pandemic risks is uninsurable by the private insurance sector alone.”

THE CHALLENGES

WHAT INSURERS CAN DO ... AND WHAT THEY CAN'T

WHAT POLICYMAKERS SHOULD DO

Pandemic prevention, vaccination procurement, virus testing and tracing, and strengthening public health systems are all essential elements in increasing resilience against future pandemics, thereby reducing the extent to which businesses would have to interrupt their activities should another pandemic materialise in the future. However, they fall outside the remit of this article with its focus purely on insurance-related issues.

Look ahead to future pandemics

A gradual return to normal life must incorporate lessons learnt from the experience of COVID-19 and, as European societies begin to reopen, the discussion around resilience will become increasingly important.

Governments — and insurers — in some EU member states have begun to explore public-private partnerships, drawing on experience of schemes to cover other, albeit different, risks, such as terrorism or natural catastrophes. These initiatives have not moved beyond national level and this is noteworthy because, despite their global nature, pandemics have a strong national component in terms of the extent and evolution of the disease, government responses to it and the resilience of healthcare systems.

Since the maximum possible loss from certain pandemic risks is uninsurable by the private insurance sector alone, as explained above, governments will need to get involved as “insurers of last resort” in any risk mitigation schemes, while still drawing on the significant expertise of the private insurance sector.

Correct the flaws in Solvency II

Policymakers must also draw lessons from the crisis in their current review of the European insurance regulatory framework, Solvency II. While it has many very good features, Solvency II does not correctly capture the real economics and risks of insurers' long-term business. This leads to an overestimation of capital requirements and excessive volatility in the solvency measures. These flaws were particularly visible in the first months of the COVID-19 pandemic, which triggered high market volatility. Those flaws could have pushed insurers into unnecessarily procyclical behaviour if the high volatility had persisted. The issue of volatility is already known and is part of the current review of the prudential framework because it pushes insurers away from long-term products and long-term investment. It is fundamental to address this in order to avoid measurement flaws in the regulation creating unnecessary problems for the sector and barriers to investment.

Awareness-raising campaigns

Insurers across Europe are involved in a broad range of awareness-raising campaigns. For instance, in Germany, risk-awareness campaigns are implemented jointly by state authorities, consumer protection organisations, the insurance industry, architects and other stakeholders. Their collaboration is built around a common goal: to raise awareness of the effects of climate change and natural hazards, of the benefits of loss prevention, and of best practices as regards natural catastrophe-resilient buildings. The high level of risk awareness in Germany is one of the reasons for the relatively low protection gap; indeed, the insurance penetration rate for natural perils such as storm or hail is more than 90%.
Most European insurance associations have initiatives to raise risk awareness, such as dedicated workshops, events and educational seminars, as well as frequent in-depth articles, themed newsletters, presentations and other publications.
Many French insurers have launched prevention campaigns and also support the campaigns of “Assurance Prévention”, an association founded by the French insurance association (France Assureurs). Assurance Prévention has produced numerous leaflets, infographics, quizzes, etc. to raise awareness of natural risks. Through its initiatives, it aims to develop a “culture of risk prevention” among students and teachers.

The Greek insurance association (HAIC) launched a digital awareness campaign — “Better to know than to think you know” — to provide consumers with useful information about private insurance and to set the record straight on some misperceptions. The campaign consists of six videos to educate the public about how private insurance works. Most of the videos emphasise the need for resilience in the face of natcat risks and the role of insurers in protecting private property. The videos are hosted on the interactive iknow-insurance.gr platform, which allows visitors to do a short quiz to test their knowledge of private insurance and then obtain additional information.
Insurance Sweden is currently working with its members on a common methodology for calculating carbon dioxide emissions during building repairs. The aim is to raise awareness of the impact on CO2 emissions of rebuilding after fire or water damage, and thus of the importance, from that perspective as well, of preventing such damages.
Insurance Sweden published a statistical report in October 2021 on how different municipalities and regions have been affected by damage caused by flooding, storm and fire.
Spotlighting the central role of municipalities in climate-change adaptation, Insurance Sweden ranks Swedish municipalities according to their adaptation work. The methodology is based on the European Commission’s Adaption Support Tool (2013). The ranking is released every other year, the June 2021 version is available here.
UNESPA, the Spanish insurance association, launched a dedicated website in October 2021 — “Naturalmente Protegidos” (Naturally protected) to explain how natcat insurance works in Spain. It focuses on 10 different risks (rain, flood, wind, drought, frost, hail, snow, earthquake, volcanic eruption and lightning) and details for each how insurance covers property, life, harvests and livestock. The website illustrates the success of the Spanish public-private natcat insurance model. It was jointly developed by private insurers (UNESPA), the Consorcio de Compensación de Seguros (CCS) government scheme and Agroseguro, Spain’s agricultural insurance system, and was launched within the framework of Estamos Seguros, UNESPA’s financial education campaign (running since 2016).
In collaboration with CEPYME, the Spanish confederation of SMEs, UNESPA launched in October 2020 “Prevenir para crecer” (Prevent to grow), a website with information on insurance for SMEs. The website highlights potential risks to which SMEs are exposed, including natcat-related risks, and provides advice on how to prevent them.
Insurance Ireland, the Irish insurance association, and a number of Irish insurers have launched consumer blogs and information repositories on their websites to share useful information with consumers about responsible and ESG investing.

Education

The European insurance industry works to increase financial literacy in relation to risk awareness, insurance protection and long-term savings:

The Croatian Insurance Bureau (HUO) launched a first educational project in 2009, “Financial literacy in the Republic of Croatia”, which was followed by a range of educational activities, often implemented jointly with independent insurers. One of these activities, “Safer Tomorrow”, was initiated in 2021, and aims to raise citizens’ awareness of the benefits of insurance. Within the framework of the project, HUO launched several videos and infographics, some of which specifically target young people.
The HUO organises a yearly competition for the best scientific paper, the best graduate thesis and the best undergraduate thesis in the field of insurance. HUO also publishes the “Croatian magazine for INSURANCE”, a scientific journal for professionals to advance good practice in the sector. Finally, some insurers in Croatia created a colouring book for children to promote financial literacy at a young age in a fun and simple way.
In Italy, the ANIA Academy, together with CeTIF (Research Centre on Technologies, Innovation and Finance of the Università Cattolica del Sacro Cuore), launched the second edition (2022) of the 2nd level master’s in insurance management to train professionals and enable them to respond to the challenges of the “new normal”.
ANIA is also collaborating with LUISS Business School to develop a major course in insurance management as part of its Executive Master in Financial Management.
Insurance Europe produces information for consumers as part of its “InsureWisely” financial education initiative. This includes one-pagers on different insurance topics, including how to limit the effects of natural catastrophes.
The French insurance association (France Assureurs) developed a series of educational booklets within the framework of EDUCFI (the French national strategy for economic, budgetary, and financial education), an initiative launched by the French Central Bank. These booklets help users to better understand how insurance works and what insurance products do and do not cover.
The Spanish insurance association (UNESPA) set up a financial education programme for schools, “El Riesgo y Yo” (“The Risk and I”). It involves 40 insurance undertakings and 164 volunteers and aims to give 2 500 teenage school students basic financial knowledge and insights into risk management.