Strategy sessions begin now for the insurance industry- addressing coverage gaps, policy forms, staff utilization, remote working methods, customer engagement, scalability of digital methods, virtual claim adjusting techniques, parametric products, and business interruption cover among others, and the big challenge of the insurance world- systemic risk.
And the big, big elephant in the room- selling empathy as a key deliverable.
Outside of health cover being broadened in most countries, there are few COVID-19 positives the insured public have seen recently from the insurance industries, and several negatives.
How to avoid repeating the COVID-19 outcome? Learning starts now.
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Late December 2019 into early 2020 there were indications that business interruptions would become a concern for commercial customers operating in China. The city of Wuhan was quarantined by the end of January, the Hubei Province by mid-February, Starbucks closed branches in the immediate coronavirus outbreak areas by mid-February, hotels and non-essential businesses closed shortly thereafter. Global supply chain partners became aware of the COVID-19 problems, the effects on normal business became clear to all, as were the concerns the outbreak would spread into other parts of the globe. Risk managers would have been examining their portfolios and projecting financial effects from what was and what probably would be.
At that time there was little being reported regarding the greatest insurance exposure- business interruption. The cover was surely being considered as Claims Pages published “Many Global Firms, Excluded From Epidemic Insurance, Face Heavy Coronavirus Costs,” on January 29. Carriers were moving into defensive postures since BI losses were surely to be claimed, and the financial breadth of global BI while not certain at the time, would have been anticipated to be in the billions (now known to be in the trillions of dollars.)
In knowing that in most cases BI claims would be found to have no coverage carriers simply planned the defense- less said seemingly, the better. No one carrier (or the industry) could have anticipated a pandemic, but in the post-SARS and post MERS insurance environment there were clear actions taken by carriers to exclude pandemics or disease outbreaks from business cover, absent specific endorsements. Additionally, the industry-wide expectation of no need for financial protection from an outbreak is found in the fact that little or no reinsurance for pandemics existed at the onset of COVID-19. That is not wrong, that is simply traditional risk management. Where insurers, governments, and insureds went wrong was not having alternative paths in place to deal with an outbreak, and for insurers, not taking a more public, empathetic position for their customers.
“A look in Lombard’s crystal ball reveals three possible outcomes of turning a deaf ear to reputation risk: first, customers will ask what’s the point of insurance if it doesn’t pay out at the time of greatest need. Many will self-insure. Second, politicians will threaten to force insurers to pay up. Already US state legislators and lawyers have threatened to force the payment of virus-related claims. Third, businesses in extremis will band together to launch class actions.”
Indemnity models for pandemics remain a non-starter for P&C products; simply too difficult to rate, and if rated, too expensive for those who might choose the cover. But that does not preclude insurers from recognizing a need to help.
A timely posting by Dr. Marcus Schmalbach speaking on alternative risk management techniques cites parametric products as an apt option for systemic risk, mentioning this key phrase:
“Parametric insurance is based on inclusion rather than exclusion.”
Indemnity insurance models are generally tied to proof of loss, estimated values, etc., all time consuming and processing heavy lifts, and subject to what is NOT covered. Considering parametric options for the next pandemic allows an agreed payment based on an agreed, readily measured trigger (index), and fully transparent policy expectations. All that’s needed for payment is the index being reached, all the processing can be automatic, even leveraged through distributed ledger technology for transparency among the parties.
Keep in mind- parametric products will not satisfy all costs as an indemnity model/policy might, but parametric products can fill the immediate need gap.
That’s a big start to what to do next time, and other thoughts:
- There can be global efforts to build catastrophe vehicles (as have been discussed in prior articles.)
- There can be carrier outreach that simply serves as information and advice.
- There can be collaboration among carriers, government agencies, and legislatures to ensure focus is not lost between COVID-19 time and the next pandemic or other systemic risk occurrence.
- There can be learnings to get in front of disasters in lieu of efforts to hide behind policy provision walls.
- There can be empathy expressed early and often.
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