This time last year, Guy Carpenter released a report titled The Changing Nature of Risk. The premise of the paper was based around the growing complexity of risk, and the opportunities and challenges confronting the (re)insurance sector as it navigates one of the most significant periods of change in recent times. Although written in the context of loss accumulation, the changing climate and digitalization, events in 2020 have reinforced the key takeaways from our report: the reality of a rapidly evolving risk environment and the potential for catastrophes to become systemic in nature.
These two trends are encapsulated in the COVID-19 pandemic, according to a recent Reactions article by Peter Hearn, President and CEO of Guy Carpenter.
Despite pandemic risk being a known threat, who could have predicted at the turn of the year that, within three months, governments worldwide would simultaneously impose quarantines, travel restrictions, business closures and a variety of other measures in an attempt to mitigate the spread of a virus? Countries across the globe are having to deal with a lack of preparation and planning. While lockdowns have helped to flatten the infection curve in some countries, the economic consequences are considerable. This may not be the end of the matter, either: localized lockdowns are already being reintroduced in several countries amid a resurgence in infections. Further financial market volatility and unanticipated consequences cannot be ruled out at this stage.
The crisis has introduced significant uncertainty into the (re)insurance market. As ultimate losses related to COVID-19 are largely unknown, there is substantial variability within and between estimates for COVID-19, ranging from a low-end USD 30 billion to close to USD 100 billion. COVID-19 is unique for its significant multiline underwriting loss and its global breadth. It will be months, or even years, before claims develop fully, given the complexity of coverage disputes and potential liability consequences.
Should claims from COVID-19 settle at the higher end of current market estimates, or another major event occurs in the third or fourth quarters, losses could reach unprecedented levels for the full year and seriously test the limits of carriers’ capital resilience.