COVID-19 insured losses could reach staggering $80bn in 'severe' scenario: WTW

Broker Willis Towers Watson has projected COVID-19 general insurance losses between $32 billion and $80 billion across key classes in the US and UK, including the London market.

The broker has revealed its initial estimate of the financial impact of COVID-19 to the property/casualty insurance industry.

These include US and UK business interruption, contingency, US directors & officers, US employment practices, liability, US general liability, US mortgage, trade credit and surety and US workers compensation.

In an “optimistic” scenario, wherein the world returns to “pre-COVID-19” state following three months of social distancing, WTW estimates there could be $11 billion in COVID-19 insured losses within these selected lines and geographies.

In a “moderate” scenario, with a gradual return following six months of social distancing, it estimates $32 billion in COVID-19 insured losses.

And, in a “severe” scenario, where the health impact approaches the scale of the 1918 flu pandemic, Willis expectes these losses to rise to a staggering $80 billion.

Alice Underwood, global leader, insurance consulting and technology, Willis Towers Watson, said: “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.”

The UK insurance industry, for example, has already started discussions with Pool Re, the UK government backed terrorism reinsurance pooling arrangement to provide pandemic cover. Similarly, the French government has set up a working group to investigate how insurance for black swan events can be provided in the future. This highlights how governments are looking to the insurance industry to help provide both expertise in this difficult circumstance as well as future risk transfer mechanisms.

The report also estimates the potential offset effect on US and UK motor classes. Where an insurer has a large motor book, especially in the US, it is expected that social distancing policies, which reduce the total number of miles driven, will mean a material drop in incurred claims. This will enable significant premium rebates, which Willis Towers Watson also estimates in the various scenarios.

Christopher Bozman, senior director, Willis Towers Watson, explained: “Based on our 'Moderate' scenario, we estimate a potential drop in US personal auto losses of $40 billion relative to expectations going into 2020. However, premium rebates given by auto insurers already may exceed $10 billion and could continue to grow. The ultimate extent of rebates is highly uncertain and will depend on insurers’ reactions to emerging data related to frequency reductions.”

Richard Clarkson, head of London market consulting, Willis Towers Watson, added: “With the world heading towards a recession, the length of which in our scenarios ranges between six months and three years - with falling payroll, GDP, global trade and travel - it has never been more important for insurers to perform a strategic assessment of their portfolios. Expected reductions in premium income opportunities, combined with changing risk profiles, will challenge any insurer’s pre-COVID 19 business plans. We see strategic portfolio management as a major area of focus to achieve adequate returns, and indeed profitable growth, over the next three years.”