To emerge from COVID-19, we must learn from it together

Here, the Lloyd's chairman writes about how insurance products and structures must evolve to help society deal with the pandemic's impact.

The insurance industry is now challenged to develop innovative products that cover new or heightened future risks. (Shutterstock)

The COVID-19 pandemic has had a shuddering impact on people, industries and economies worldwide. The insurance industry is no exception. We are being tested on multiple fronts.

2020 will be one of the costliest years on record. In May, Lloyd’s estimated a projected loss to the insurance industry of $203 billion (the sum of combined underwriting losses of $107 billion plus a $96 billion hit to insurers’ investment portfolios).

Whilst investment markets have made a strong recovery since March, volatility remains high, and there are reasons for continued caution as the world economy begins to recover. What’s more, the impact of the pandemic is now set to continue well into 2021.

For the first six months of 2020, Lloyd’s incurred pandemic-related losses amounting to $3.1billion, with a further $800 million expected to be booked in the second half of the year. For the full year, Lloyd’s expects to pay out up to $6.4 billion in COVID-19 claims (with some $2.6 billion expected to be recovered from reinsurers). This is in line with the projections we published in May and is on a par with the combined impact of hurricanes Harvey, Irma and Maria in 2017.

Lloyd’s remains well-capitalized to withstand the impacts of COVID-19, and the market is strong and resilient enough to withstand the natural catastrophe events that occur in the second half of the year. This is due, in part, to our unique ability to recapitalize post-loss in a year. In the first six months of 2020, the market’s net resources increased by 7.2% to $42 billion as of June 30, 2020, reinforcing the strength of Lloyd’s balance sheet and generating a central solvency ratio of 250%.

Nevertheless, unlike catastrophes such as hurricanes, earthquakes and floods, the COVID-19 pandemic does not respect borders, and it has no geographic bounds. It has hit everywhere almost simultaneously and for an indefinite period. We do not really know when it started, and we certainly do not know when it will end. As a result, the pandemic demands a different response from insurers, and businesses are quite rightly looking to the insurance industry for solutions to protect them from similar shocks in the future.

Building resilience

While it is critical to take the immediate steps necessary to address the impact of COVID-19, as we would with a major hurricane, we must also look further ahead to help the societies in which we operate build greater resilience against future events. Our products and structures need to evolve to help society deal with the impact from the pandemic and to speed up recovery through these challenging times. We also need to develop innovative products that cover new or heightened risks that our customers may encounter in the future, from a second wave of the pandemic, or, indeed, from other systemic risks, perhaps linked to cyber risks or climate change.

Some of this we can do on our own, but in other areas, we need to work in partnership with governments and other third parties — the scale of this pandemic is simply too large for the global insurance industry to address on its own. Earlier this year, Lloyd’s started discussions with governments and agencies from around the world to explore how a public-private partnership might work.

Alongside these efforts, we must also look to close coverage gaps that the pandemic has exposed, such as intangible risks that now account for around 85% of the value of companies in the S&P 500. Lloyd’s Product Innovation Facility and our new Lloyd’s Innovation Lab cohort are both looking at ways to offer protection for intangible risks such as brand, reputation, intellectual property and human capital. This has become even more important as the impact of COVID-19 has accelerated the adoption of digital business models.

Lloyd’s is also developing a Centre of Excellence to research systemic risks that will develop data, boost underwriting expertise and create new models to enhance our understanding of these and other risks. This could help insurers design new, flexible products that would protect businesses now and into the future.

Recognizing the role that Lloyd’s has to play in providing protection for the many risks associated with the pandemic, in July we approved a new Syndicate — 1796 — which has been set up to insure the storage and transportation of COVID-19 vaccines. It was given the number ’1796′ in honor of the year physician Edward Jenner carried out his first experiments in what would become the smallpox vaccine; the world’s first vaccine and, as yet, the only disease the world has ever eradicated through vaccination.

Digital insurance must take hold

Social distancing measures have forced us all to adopt new ways of living and working. I believe Lloyd’s operations stood up very well throughout lockdown. Although we had to close the Underwriting Room for the first time since the Second World War, the market has shown it can trade effectively using the Lloyd’s digital platform. We converted to digital operations seamlessly, remaining open and trading efficiently throughout, and providing our customers with risk transfer solutions without interruption. In fact, volumes of enquiries coming into the London market are higher than pre-crisis, as customers and brokers have struggled to find capacity for their risks elsewhere.

We reopened the Underwriting Room at the beginning of September and have also taken the opportunity to accelerate the implementation of digital enhancements and technology to complement and connect with the best features of the physical Underwriting Room, as part of our Future at Lloyd’s ambition. This includes significantly improving our digital connectivity within the Lloyd’s building, creating virtual meeting spaces, as well as building a virtual room that will enable brokers and underwriters working online to connect and collaborate directly with the physical trading environment.

This is an exciting development for Lloyd’s and will enable the market to reach out in real-time to its customers and partners all around the world.

Long-term growth

We must learn lessons from the COVID-19 pandemic so we are better prepared for the next global crisis. This will be a historic year for our industry, and we have an important role to play.

At Lloyd’s, we stand ready to do our part to develop the protections and solutions needed to solve tomorrow’s big challenges.

We can all play our part by working together, supporting each other, supporting our customers, and aiding their recovery and future protection. If we succeed in meeting this ambition, I am confident that we will emerge stronger than ever.

Bruce Carnegie-Brown (bruce.carnegie-brown@lloyds.com) is chairman of Lloyd’s of London. These opinions are his own. This piece was written exclusively for the National Underwriter family of publications. It is published here with permission from Lloyd’s of London and may not be reproduced.

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