Industry has role to play in making pandemic risk transfer a reality: Guy Carp

The industry needs to move towards the creation of pandemic backstops sooner rather than later and ensure its risk modelling expertise and risk mitigation techniques are available and used to help make pandemic risk more insurable.

That is the view of Charles Whitmore, president–global accounts, head of Placements Solutions Group, Guy Carpenter, speaking to Intelligent Insurer.

“We all recognise that a pandemic such as COVID-19, which has the ability to create contagion across multiple lines of business and geographies, is impossible to insure via conventional means,” Whitmore said.

“Sustainable and robust economic resilience against the next pandemic can be generated only via the establishment of government-backed risk transfer mechanisms which will allow funds to reach those most in need swiftly following a loss.

“In the meantime, the insurance industry needs to move quickly to apply its risk modelling expertise and risk mitigation techniques to help make pandemic risk more insurable,” Whitmore said.

He noted that Marsh & McLennan Companies has created a combined Group Task Force to help governments and insurance associations consider the best approach. He acknowledged there are many ways these backstops could be structured, from solutions for specific lines of business such as event cancellation to wider-reaching mechanisms that provide post-loss financing for entire sections of the economy.

“Developing these kinds of solution is very complex and requires ongoing communication and collaboration across a wide range of stakeholders to come to fruition. That takes time and lot of goodwill, so it is will not be an easy task,” he said.

In terms of his expectations around rates in the upcoming renewal, Whitmore said it is clear that pockets of the property cat and casualty markets were already starting to harden at the January 2020 renewal.

On the property side, rate rises were primarily driven by prior years’ cat losses, while long-tail classes saw rates increase in response to the dual challenges of social inflation and low investment yields.

“At the upcoming renewal we want to see markets differentiating clients according to performance, risk profile and relationships. Client differentiation is very important if the reinsurance market is rewarding outperformance and tightening where there are pockets of stress or underperformance, this means it is working efficiently,” he said.

Meanwhile, the improved rates environment will attract new capital, making the supply-demand dynamic a fascinating one.

“We are in a market which still has an abundance of capacity in many areas, while at the same time a significant amount of new capital is being raised to take advantage of firming terms and conditions,” he said.

“New capital will likely target the most dislocated areas of the market, although it is still not clear how much will be aimed at the primary insurance market and how much will be deployed in the reinsurance market or retrocession market.”

Making deals virtually
Against a backdrop of this complex set of market conditions, this year’s negotiation will be made even more complex by the fact that most discussions can take place only virtually and industry conferences including Monte Carlo have been cancelled. Whitmore said these challenges are real but the market has adjusted well.

“We have still been negotiating renewals face to face, but virtually. The main impact from working remotely is that almost every element of the renewal process has taken a bit longer to do, from data preparation, modelling and programme structuring to placement and documentation,” he said.

“This is mainly due to the small frictional inefficiencies involved in working virtually compared to working next to one another.

“But let’s not forget there are many markets with whom we normally trade on a virtual and electronic basis anyway, so our renewal process with many counterparties has not changed much at all.

“The re/insurance industry has demonstrated that it can continue to do business effectively while working remotely, and that we do not all need to be physically present to function efficiently. Having said that, reinsurance relationships thrive on trust, communication and the fast transfer of knowledge, so doing business in person is usually preferable.

“In the post-COVID-19 environment, the industry will probably transition to a smarter and more flexible way of working in which client meetings and certain team functions are done in person, and more project-oriented work is conducted remotely.”

Whitmore said both Guy Carpenter and the industry as a whole had adjusted well and quickly to a new virtual world imposed by lockdown measures. In the case of the broker, it meant the transition of thousands of employees from multiple global branches to home working, which was a big undertaking.

“This demanded building a more remote IT infrastructure that would give employees access to drives and, in some cases, powerful modelling data from their homes.

“To achieve this in such a short timeframe and with minimal disruption to our ability to service our clients efficiently was not only testament to the resilience and adaptability of our workforce but also a tremendous accomplishment by our IT team.

“What is more, this was achieved in the middle of a difficult Japanese renewal season back in March. We, like others, made extensive use of videoconferencing technology throughout, which largely worked very well,” he concluded.