How much premium it would take for P&C insurers to absorb global BI pandemic losses

Property and casualty insurers would need to collect business interruption policy premiums for 150 years to make up for projected global output losses in 2020 related to the COVID-19 pandemic, the Geneva Association found in a recent study.

“P&C insurers have nowhere near the capacity needed to shoulder projected global output losses of more than US$4 trillion for 2020. By comparison, they collect US$1.6 trillion in annual premiums, with just US$30 billion for business interruption policies,” said the Geneva Association, a global association of insurance companies whose members are insurance and reinsurance CEOs, in a press release last week.

The report, An Investigation into the Insurability of Pandemic Risk, found that less than 1% of the estimated US$4.5 trillion global pandemic-induced GDP loss for 2020 (according to the World Bank) will be covered by business interruption insurance. This niche segment generated less than 2% of the world’s P&C insurance market, with cover generally intended for and triggered by physical damage only.

Jad Ariss, the Geneva Association’s managing director, said when COVID-19 hit, insurers moved quickly to provide relief to their customers (for example, through reduced premiums), safeguard their employees, and engage with governments. Insurance Bureau of Canada member companies have offered more than $1 billion in personal and commercial insurance premium relief as of June 30, IBC told Canadian Underwriter recently. In addition, private insurers across Canada have provided about $200 million in deferred premiums to personal and commercial lines customers.

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“They are promptly paying all legitimate claims where pandemic risk is covered,” Ariss said of global insurers. “But, as our research shows, the pandemic exposed a massive protection gap in the area of business continuity risk. We need to find sustainable solutions which harness the industry’s potential contributions while maintaining its solvency and viability.”

Pandemic-induced business losses defy basic, widely-accepted criteria for insurability, added Kai-Uwe Schanz, lead author of the report and the Geneva Association’s head of research & foresight. “Unlike risks like natural catastrophes, they occur on a global scale and are not diversifiable. Governments and insurers urgently need to figure out the right partnership modalities to prepare for – and respond to – extreme risks like pandemics.”

In fact, “the uncontrollable aggregation of losses from pandemic business interruption could be ruinous to the risk pool and, ultimately, to the insurance industry as a whole,” the report said.

However, the report did find that life and health risks for pandemics similar to COVID-19 “pose no fundamental insurability challenges,” because they are generally non-systematic and can be modelled. There are also generally no policy exclusions for pandemics and other extreme mortality events.

“The underwriting losses of life insurers from COVID-19, while significant, are expected to remain manageable.”

Feature image by iStock.com/ClarkandCompany