So, even though we now know that the SARS-COVID-2 pandemic had its origins sometime in late 2019, if not earlier (hence COVID-19), this past week marked the anniversary of the WHO (after considerable procrastination) declaring it a global pandemic- and we all know what happened next, because we are still living through its consequences.
From the point of view of (re)insurers, one can perhaps point to a few lessons that are worth thinking about and internalizing, even if many may seem obvious, because the “obvious” is often overlooked or underestimated because it is given little attention:
– Risk models are only ever a work in progress
– Your past experience can lead you to make and apply the wrong assumptions
– As the philosopher Franz Brentano said: “What is at first small is often extremely large in the end. And so it happens that whoever deviates only a little from truth in the beginning is led farther and farther afield in the sequel, and to errors which are a thousand times as large”. In other words, seemingly small errors can compound
– One really does have to plan for the worst case. That should be a truism for any (re)insurer, but sometimes no-one wishes to believe that worst cases really can and do happen
– It is not always just about the data. Perceptions and beliefs matter because they affect behaviours, which then have consequences. The pandemic demonstrated that very clearly
– It is not just the scale, or political composition of a government that matters, but rather its quality and competence. The same would apply to any bureaucracy
– Speed of decision-making matters, but the process must be clear, unambiguous, and not easily manipulated. While the perfect is the enemy of the good, irreversible decisions must be recognized and identified as such and given proper attention in case they lead to poor outcomes
– The clarity of policy wordings matters. Whatever the merits of the arguments that have taken place in the past year over, say, Business Interruption coverage may have been, the number, content and variation of policy wordings involved led to an outcome which it is highly unlikely anyone wished for
– Governments can act within their powers, and one can have no practical recourse if those decisions harm you or your business
– How much balance sheet volatility is tolerable? Can you control and manage it, or simply absorb it? Reacting and then regretting is to be avoided
– Always look at the other party’s motivation and incentives, ensuring interests are aligned to the extent possible
– Those who cannot, or will, not adapt and learn, will fail.
In human terms, the pandemic has been devastating for individuals, families, whole industry categories, and societies. (Re)insurance ultimately exists to help individuals manage the risks in their lives, whether directly or indirectly. Any entity is based upon individual effort and capacity, even though it may be described in the abstract. The industry forgets that at its peril. However, it also worth pointing out that it has demonstrated its robustness in the face of the greatest economic crisis in several generations; and can rightly be proud of that.
The Awbury Team