The report provides an overall estimate of the potential COVID-19 insured losses across a range of pandemic scenarios,1 with loss estimates provided for those general insurance classes that Willis Towers Watson expects to be adversely affected by COVID-19. These include U.S. and U.K. business interruption, contingency, U.S. directors’ and officers’, employment practices liability, general liability, mortgage, trade credit and surety, workers compensation.
“Optimistic” scenario (return to pre-COVID-19 state following three months of social distancing): Willis Towers Watson estimates 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 six months of social distancing): Willis Towers Watson estimates $32 billion in COVID-19 insured losses within these selected lines and geographies.3
“Severe”4 scenario (health impact approaching the scale of the 1918 flu pandemic): Willis Towers Watson estimates $80 billion in COVID-19 insured losses for the same lines and geographies.
“Beyond its devastating human cost, the COVID-19 pandemic has swiftly upended economic activity around the world. It appears the industry-wide level of general insurance loss could exceed that resulting from the 2001 World Trade Center event,” said Alice Underwood, global leader, Insurance Consulting and Technology, Willis Towers Watson. “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 U.K. insurance industry, for example, has already started discussions with Pool Re, the U.K. 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 U.S. and U.K. motor classes. Where an insurer has a large motor book, especially in the U.S., it’s 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.
“Based on our Moderate scenario, we estimate a potential drop in U.S. personal auto losses of $40 billion relative to expectations going into 2020,” said Christopher Bozman, senior director, Willis Towers Watson. “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 organizations 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.
“As the world heads 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,” said Richard Clarkson, head of London market consulting, Willis Towers Watson. “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.”
About the report
This paper, which complements the COVID-19 report by Willis Re published on April 23, 2020, offers an independent assessment using a scenario-based approach to add a quantitative dimension. Our initial focus is on business written in the U.S. and U.K. (including the London Market), while noting that the reinsurance of this business could impact other insurance markets.
The report represents an early attempt to understand the different dynamics affecting property and casualty insurers. Our efforts at quantification should provide directional insights and illustrate relative orders of magnitude as we start to address the considerable uncertainty around this event; however, they should not be considered as point estimates and are almost certainly going to change as more information becomes available.
Footnotes
1 The 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 time frames 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 six 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 health care systems to manage severe infections. The result is a global spread that approaches the scale of the 1918 flu pandemic.