INSURANCE INDUSTRY FACES COVID-19 CROSSROADS

Not since the 9/11 terrorist attacks in the United States has the insurance and reinsurance industry been on the brink of such momentous potential strain as it now faces ahead of the unknown impact of COVID-19.

Reinsurers bore the brunt of the 9/11 risk as the practice among insurers was – and still is – to reinsure for major risks. If required in terms of law (as in South Africa) to retain some of the risk, they retain the bare minimum.

Although the 9/11 attacks occurred in the United States, they affected what cover reinsurers globally were willing to underwrite. As a result, insurers had to amend their policies in order to ensure the underlying policy could be reinsured.

Another consequence of the 2001 terrorist attacks was that the United States passed the Terrorism Risk Insurance Act (TRIA) in 2002 to share losses between the federal government and insurance industry. This legislation became necessary as insurers either started excluding terrorist risk from policies or escalating premiums to the point where consumers could not afford insurance.

Under TRIA, the US Government supports insurance companies once losses exceed USD 200 million. As a result, insurers once again included terrorism insurance as part of their coverage.

These developments underline the massive scale of the losses from 9/11, which were concentrated in business interruption insurance (34% of the losses), property insurance (30%) and liability insurance (23%)[1].

Some of the losses sustained in the United States due to the attack have been quoted as:

• Total insured losses amounting to USD 43.6 billion (in 2015 dollars)[2], including property, life and liability insurance claim costs resulting from the attacks on the World Trade Center, the Pentagon and Pennsylvania.
• CNN quoted over USD 230 billion in other losses, including USD 123 billion in estimated economic loss in the first two to four weeks after the World Trade Center attack, as well as the decline in airline travel over next few years. Furthermore, New York Magazine estimated that 146100 jobs were lost in New York after the attack and 2 976[3] people perished (excluding the hijackers).

Enter 2020 and COVID-19

COVID-19 is a pandemic that in most cases, including South Africa, will not be covered by property and liability insurance.

Current life policies and group insurance policies are likely to cover the deaths of individuals or permanent employees due to COVID-19. Given the unemployment rate in South Africa and the low rate of insurance cover, the majority of South Africans lack such sophisticated cover. Most people only have a funeral policy.

In the non-life sector, if reinsurers are willing to give reinsurance cover, insurers may be able to extend cover to liability and property risks – albeit at a premium (which may be expensive).

Alternatively, as the United States did with TRIA, legislation may be enacted to require Government to create a fund to cover future losses. (Ironically, President Donald Trump on 20 December 2019 signed a federal funding package that includes a seven-year extension of the TRIA, which assists with coverage relating to commercial risks and excludes other types of insurance such as life, health and reinsurance.)

In the case of South Africa, another option is to extend the mandate of the South African Special Risks Association (SASRIA), which only covers against risks such as civil commotion, public disorder, strikes, riots and terrorism. Under the country’s current insurance framework, here is a glimpse at how the COVID-19 pandemic is likely to affect the insurance industry and its customers.

• Existing individual life policies that provided cover in terms of a pandemic will continue to provide cover. Consumers need to be cautious about cancelling an existing life policy and replacing it with another. Depending on the number of insured lives that will be paid out due to the pandemic, any future pandemic may be excluded for new policies.
• Group policies are renewed on an annual basis, so companies need to be aware that when renewals become due, reinsurers may change their approach. If they no longer want to reinsure pandemic-related deaths, this may result in group policies excluding deaths or disabilities arising from a pandemic.
• Banking institutions, where loans are provided and require insurance policies to be ceded as a form of security, will need to consider what other forms of security may be required to cover risk of default due to pandemics.
• Lending to small businesses and private individuals will need to be reconsidered not only to ensure financial stability in the economy but also to comply with requirements around ‘treating customers fairly’. This is important as insurance policies ceded as security may not cover the risk of default.
• Medical aid premiums are likely to increase, to cover the costs associated with the pandemic.
• Government will need to look at how State-run hospitals, schools and departments should change the way services are offered, what skills are lacking and how infrastructure should be upgraded or modernised to cater for healthcare services in pandemics. This will impact planning for the National Health Insurance scheme.
• Retirement funding will need to be reconsidered, particularly in cases where the funds of a pension or provident fund are managed by the trustees of the fund. Going forward, trustees of funds will need to consider how investments can be used to mitigate risks to their members. This may require that fund rules are amended.
• Where pension or provident funds procure a policy underwritten by insurers and the insurer undertakes to provide policy benefits for the purpose of funding in whole or in part, the liability of a fund to provide benefits to its members in term of its rules comes into play. Again, where an insurer will no longer provide certain benefits, rules may need to be reviewed.

It is far from clear at this point how the COVID-19 pandemic will reshape the insurance and reinsurance industry. However, there is no doubt that an economy lacking the ability to mitigate its risk through insurance is an extremely vulnerable economy. Some reshaping will certainly be needed.

[1] Insurance Information Institute (III), Background on: Terrorism Risk and Insurance, at https://www.iii.org/article/ background-on-terrorism-risk-and-insurance; III figures further adjusted using data from the Bureau of Labor Statistics

[2] Source Insurance Information Institute www.iii.org

[3] Source Insurance Information Institute www.iii.org