Suddenly There Is Big Demand for Pandemic Cover, Says Underwriter

By | April 14, 2020

In the midst of this pandemic, insurance buyers and their brokers are looking for COVID-19 pandemic coverage, which is like buying property insurance when your house is on fire, according to Tracey Gibbons, senior vice president, Underwriting, at Third Point Re.

“We’ve been inundated – every day we get requests to write coverage for COVID-19, on a worldwide basis,” she said.

Third Point Re is fielding inquiries from governments that are trying to buy COVID-19 coverage because “they suddenly have a huge expense in terms of what it’s costing to test people and the cost of the associated healthcare crisis.”

Tracey Gibbons

Many of these requests for cover are hoping to limit potential losses from the current pandemic, but “are being sought a little too late in the day,” Gibbons continued.

While COVID-19 pandemic coverage probably will be available at some point, there are currently too many uncertainties to be able to write the risk profitably, she said.

“Nobody has any data on this pandemic. Nobody really knows where this is going – even all the people doing work on the statistics. Nobody really knows what the death rate is, or what the infection rate is. So that creates a huge problem for underwriters,” she said in an interview with Insurance Journal.

She recalled a conversation with a broker whose client wanted to buy pandemic cover, even with the COVID exclusion. The reason? The client had told the broker: “You know, I’m bleeding money now; I can never be in this situation again. Let me buy something for the next time.”

“However, coverage for COVID-19 may eventually be available once – if – we have better data and know what the infection, hospitalization and death rates are,” Gibbons said. “Once governments have a better idea of how they are going to handle any restrictions on movement, we may be better placed to provide coverage.”

Gibbons explained that the move by governments to slow or stop the spread of the virus “is the biggest driver of economic loss and the biggest driver of losses to the market.”

“That element is far more difficult to predict than infection rates, hospitalizations or deaths,” she said.

While pandemic re/insurance currently excludes COVID-19, many insurance buyers are still looking for coverage – for protection against future pandemics. “This is not just where there is a direct pandemic exposure but also where there is indirect exposure from the knock-on effect of the virus on the economy and how business is conducted,” she said.

She recalled a conversation with a broker whose client wanted to buy pandemic cover, even with the COVID exclusion. The reason? The client had told the broker: “You know, I’m bleeding money now; I can never be in this situation again. Let me buy something for the next time.”

That’s a big change from the pre-COVID-19 market for pandemic cover, when there was little overall interest in the cover.

Gibbons said in the past there was a disconnect between what reinsurers were willing to provide in terms of price and what the market wanted to pay.

“There were a lot of people who happily would have bought pandemic cover if they could’ve gotten it for 0.5% rate on line, but very few carriers were willing to write it for that amount,” she said.

“I think this event has been a huge wake-up call to the economic community, to potential insureds.”

Brokers and re/insurers are now seeing a huge interest in buying cover and people are now willing “to pay considerably more than 0.5% rate on line for it.”

“There’s going to be a scramble for capacity, I think, and there will be limited capacity because of the nature of the beast. There’s not going to be enough cover for everybody,” Gibbons continued.

This is why there has been talk about the need for governments to provide a backstop, similar to those developed for terrorism, she explained.

Standalone Pandemic Cover

Gibbons said, ideally from an insurance/reinsurance perspective, pandemic would be excluded from all covers and then written as a buy-back, as standalone pandemic cover. She described standalone pandemic as “the perfect pandemic cover.”

“This type of cover certainty exists in many lines of business, but in others the cover can be embedded or included as silent cover.” As an example, she went on to say, many companies that write travel insurance will carve out the pandemic exposure for trip cancellation.

She noted that re/insurers may find their travel insurance exposure reduced because many airlines and hotels are providing refunds to their customers. With no loss to the policyholder, there is no need to make an insurance claim.

“As a result, the impact of this pandemic on that [section of the] market is not going to be anywhere near as bad as it could have been.”

Some Lower Loss Ratios

And there are other silver linings for the industry, in the midst of the coronavirus pandemic.

“As horrible as this situation is and there are going to be some significant losses in the market, there also are some things happening which are going to have positive effect on loss ratios,” Gibbons said.

She pointed first to the fact that there are reduced numbers of auto accidents now that there are fewer drivers on the road. “In the U.S., a large portion of insurance losses, every week, are from auto accidents.”

In addition, there are fewer people going to work and, therefore, they are not accumulating in buildings as they normally would, she added. “I think there’s definitely a reduced chance of a terrorist attack, which is something that our book is exposed to.” She recalled with amusement the news reports last month that the Islamic State terrorist group had warned its followers to avoid traveling to Europe because of the coronavirus outbreak.

While the probability of an earthquake hitting has not diminished and the property loss from that would be the same, the impact on the population, on people, would be much less because of the lowered concentration, Gibbons continued.

The problem for reinsurers is that pandemic exposure has no geographic segregation or diversity – by definition it’s a global event. “You have one global aggregate which you’re willing to deploy,” she said.

“When a pandemic happens and it goes worldwide, it doesn’t help you if you’ve written one risk in New York and another one in Japan; it’s going to hit the same book.”

Third Point Re’s COVID Exposures
Daniel Malloy

Regarding Third Point Re’s exposure to COVID-19, CEO Daniel Malloy did not think the company would see many claims from business interruption because it does not write a significant amount of property-catastrophe exposed commercial property.

However, it does reinsure areas such as mortgage, trade credit and political risk, he said during the interview. (Third Point Re writes pro rata and excess of loss pandemic reinsurance).

Third Point Re also has exposure in the contingency market, which amongst other things, covers event cancellation, Gibbons confirmed.

This market faces “sizable exposures” because few underwriters, when calculating their potential exposures thought within the next six-plus months “that every single event in the world would be canceled,” she said.

“I don’t think that was in anybody’s scenarios. And whilst pandemic cover was purchased, it wasn’t the driver of the purchase for a lot of buyers,” she added.

Most re/insurance buyers of contingency cover were probably more concerned about a potential terrorist attack, which could either destroy a venue or shut down a particular area, or the effects of a hurricane, a typhoon, or an earthquake, she said. “You can model all of those and usually they will hit a portion of a book or even a single policy. This pandemic is hitting every single policy. We have exposure to [event cancellation], and that’s not a specific pandemic cover.”

The nature and extent of the overall risk and the reaction of clients and the company’s portfolio “is going to play out over the next months and years,” said Malloy, noting that he would have more definitive numbers of Third Point Re’s pandemic-related claims by the time the company releases its first quarter results in May.

“One of my colleagues used the analogy that COVID-19 is almost like watching a hurricane approaching the coast. You can repeatedly run your models, but the hurricane can go to the left, go to the right, can speed up, can slow down, can sit in an area for a while,” he said.

In other words, the modeling looks at all possible outcomes, one may happen, but the hurricane will go where it goes, just like the coronavirus, he indicated.

Photograph: View of Mestalla stadium during the Champions League round of 16 second leg soccer match between Valencia and Atalanta in Valencia, Spain, on Tuesday March 10, 2020. The match was played in an empty stadium because of the coronavirus outbreak. Photo credit: AP Photo/Emilio Morenatti.

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