UK and US insurers could face Covid-19-related loss of up to $80 billion

05 May 2020 3 min. read
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The financial impact of Covi-19 could see the insurance industry hit with losses of between $32 billion and $80 billion. If the current pandemic takes longer than three months to bring under control, US and UK insurers could see their business models come under severe strain, according to a new report.

The sudden lock-down engaged to prevent the spread of Covid-19 has had a catastrophic impact on the global economy. Scarcely any sector has seen anything but a major drop in its revenue growth – even the consulting sector, which has been managing to maintain its prosperity even as the wider economy has seen stagnant performance.

One of the sectors looking likely to be stung with the most significant losses amid the current pandemic is perhaps unsurprisingly the insurance industry. While insurers with large motor books might be thoroughly enjoying the lock-down, as a massive drop in traffic means they will have fewer claims to pay out on, most of the industry’s key players also deal in business interruption, contingency, directors and officers, general liability, trade credit and workers compensation offerings – all of which will be facing a huge spike in pay-outs now.

Cumulative confirmed reported cases since 1 March 2020

According to a new report from Willis Towers Watson, the coronavirus outbreak presents a rapidly developing crisis for insurers, which will lead to multi-billion losses in a best-case scenario. The researchers argued that these expected falls in premium income opportunities, combined with changing risk profiles, will challenge any insurer’s pre-Covid-19 business plans mean it has never been more important for insurers to perform a strategic assessment of their portfolios, than in the coming three years.

Focusing on the UK and US markets, Willis Towers Watson drew up three possible scenarios for the outcome of the current crisis, in terms of business interruption, contingency, directors and officers, employment practices, liability, general liability, mortgage, trade credit and surety, and workers compensation. The most optimistic of these assumes the world can return to a pre-Covid-19 state following three months of social distancing, and the researchers subsequently estimate Covid-19 insured losses would be limited to $11 billion within the selected geographies.

Potential ultimate loss impact of COVID-19

However, with the rate of infection plateauing in the UK and US at best, and government mismanagement of the crisis having seen the countries take much longer to bring the virus’ spread under control than China, it is far more likely that there will at least be a ‘moderate’ scenario. In this case, there would be a gradual return to pre-Covid-19 conditions after six months of social distancing, which Willis Towers Watson estimated would see $32 billion in Covid-19 insured losses in the two markets.

In an alarming worst-case ‘severe’ scenario, however, this loss could more than double. In this case, Covid-19 would have a health impact approaching the scale of the 1918 flu pandemic. Spanish flu was an abnormally deadly strain of influenza, as the trenches of the First World War favoured the spread of more aggressive strains of a virus – something which led to a global death toll estimated anywhere from 17 million to more than 50 million. In such a scenario, Willis Towers Watson estimated some $80 billion in Covid-19 insured losses for the same lines and geographies.

Speaking on the research, Alice Underwood, Global Leader, Insurance Consulting and Technology, Willis Towers Watson, commented, “Beyond its devastating human cost, the Covid-19 pandemic has swiftly upended economic activity around the world. At this point, it appears that the industry-wide level of general insurance loss could exceed that resulting from the 2001 World Trade Centre event. Given the potential scale and systemic nature of pandemic loss, discussions about the need for some sort of government backstop to address future pandemic risk have already begun.”