The Insurance Implications of the Coronavirus “Catastrophe”

Robert Muir-Wood, Chief Risk Officer, RMS

Tim Edwards, Regional Director – Head of Catastrophe Analytics Globals, Willis Re

This article was originally published in Insurance Day

The economic impact of COVID-19 (coronavirus) is clearly going to be significant, with global growth in gross domestic product (GDP) for 2020 now expected to be only half that of the three percent originally anticipated, at best. Relative to the US$86.5 trillion global GDP for 2019, that equates to around US$1.3 trillion dollars of lost economic activity. This is twenty-five times the economic loss estimated from the SARS outbreak in 2002-3.

The losses from COVID-19 will emerge from many facets of the economy.   

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Risk and COVID-19

Perhaps the most difficult and unfamiliar feature of the coronavirus pandemic is how the associated risk is rising rapidly through time. We are all used to managing our response to risks that are relatively stable, such as street crime or dangerous driving. The risk from the COVID-19 is different.

It is going to be with us for a while, and in many countries its rise looks exponential. This steep, geometric progression is completely new to most of us. However, those who have lived through hyperinflation in Zimbabwe or Venezuela know what rapid and out-of-control feels like. In several countries, rates of incidence and of mortality have been doubling every three days: imagine fighting an army that on day three has doubled in size and after a fortnight is thirty-two times bigger than on day one.

So how do we manage our own personal risks through this extraordinary period, and how should companies help make risk-based decisions on behalf of their employees?

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Containment of COVID-19 Is the Best-Case Scenario

Dr. Tedros Adhonom Ghebreyesus, director-general of the World Health Organization (WHO), has insisted that containment of COVID-19 is feasible, and must remain the top priority for all countries, but that there is not a one-size-fits-all approach. This was reiterated by Dr. Gaudenz Silberschmidt, director, health and multilateral partnerships – external relations at the WHO, who gave a keynote talk at the ReFocus 2020 conference in Las Vegas on March 3. This is the leading annual meeting for senior figures in the life insurance industry.

After his keynote, as an expert on pandemic risk modeling, I participated in a panel together with Dr. Silberschmidt and others, on the benefits of prevention. All the panelists, including myself, expressed support for this focus on containment, and the overall approach the WHO is taking in dealing with the COVID-19 outbreak, especially in Iran where the WHO has sent an urgent mission.

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Update on Multidecadal Variability of European Windstorms

At this moment, you might expect a blog about European windstorms to be about recent Storms Ciara-Sabine, Dennis and Jorge causing wind and flood losses of a couple of billion euros in Europe. However, the losses this winter are modest in a longer-term context. Instead, I think the recent insights into longer-term variations in wind losses could have much more impact on how we price windstorm risk.

We first noticed multidecadal variability of European windstorm activity ten years ago, with 50 percent lower frequencies of damaging storms in the new millennium than in the eighties and nineties. This variability is important: a company’s length of loss experience is unlikely to match the model calibration period, which impacts model validation. It also held the promise of improved risk management, if the storminess changes could be anticipated. We needed to know more about it.

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Economic Impact of COVID-19 Will Be Far Worse than SARS

Imagine being seated for eleven hours on a plane next to a passenger wearing an anti-viral face mask, and with a hand sanitizer clipped to his back-pack, which he dipped into for cough relief lozenges. This was my stressful experience last week; and it could be a common anxiety in the months ahead.  IATA has estimated a revenue loss of about USD $30 billion this year, most of which would be in the Asia-Pacific region. But this was assuming that Covid-19 would play out like SARS in 2003, which caused a sharp decline for six months, followed by a quick rebound.  Many business sectors other than aviation are likewise hoping for recovery after the summer. The fate of the Tokyo Olympics depends on recovery by July.

SARS was a very severe disease. Most patients developed pneumonia, and about 10% died. According to China CDC, about 5% of Covid-19 patients have critical diseases including respiratory failure, septic shock and multiorgan failure.  In about 14% of cases, the virus causes severe diseases including pneumonia and shortness of breath. But about 80% of patients have a mild form of disease. Reassuring as this may sound, the mildness of most cases makes Covid-19 a far greater global menace than SARS. Those infected with SARS were not infectious during the incubation period.  This greatly facilitated the task of tracking infected contacts of SARS cases; surveillance could focus on those contacts who developed symptoms.

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The Coronavirus Outbreak: Part Two – Self-Isolation and Quarantine

The village of Eyam in Derbyshire, central England, was unlucky to discover that the pandemic, then raging 150 miles (226 kilometers) to the south in London, had arrived on its doorstep.  

The pandemic was the plague – the year was 1665. The disease had reached Eyam through the delivery of flea-ridden cloth from London to the local tailor, who would then made clothes for the villagers. The fleas carried the plague bacterium and the recipient of the cloth was the first to die.

Within three months another 41 villagers had perished. By spring 1666 a newly appointed rector proposed that, for the sake of other plague-free towns in the Peak District region, the village should self-isolate. A local Earl offered to guarantee food for the town (supplied on a rock at the edge of the village, paid with coins immersed in vinegar – see location below). In June 1666 the villagers reluctantly agreed. Over the summer the plague returned with a vengeance and there were five or six deaths each day. Eventually one third of the population died. But the nearby towns stayed plague free.

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The Coronavirus Outbreak: Part One – Modeling “Spotting”

Since 2017, in modeling the threat from wildfire on communities in California, the significant new RMS innovation has been in capturing the process of “spotting” (i.e. identifying new outbreaks of fire far from the fire-front). Strong dry winds bring swarms of glowing embers from a raging wildland fire, which can travel long distances. Should these embers settle on shingle roofs, wooden patios or a leaf-filled plastic gutter, a fire will start. Unchecked, the fire will consume a house.

In high-density housing suburbs, wind-driven fire can spread from building to building and consume a whole neighborhood – as happened in the city of Santa Rosa in 2017. And the only way to stop an outbreak is to intervene: to extinguish each ember-ignited fire before it can spread.

Modeling ember ignitions requires sampling the speed and direction of the wind and also anticipating what proportion of fire-starts get extinguished before they can spread. Still it only takes one unchecked fire to burn down the town.

This same process, in modeling “spotting”, is key to anticipating the spread of the new coronavirus into western Europe and North America.  

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How to Contribute to the Risk Data Open Standard (RDOS)

It is an exciting time for the insurance and wider risk management industry. As of January 31, a new asset for the industry – the Risk Data Open Standard (RDOS) has been made publicly available on GitHub, the largest host of source code in the world, with over 100 million repositories and over 37 million users. It is available royalty-free to the public. The RDOS represents a step change in how risk management data is managed and is designed to overcome and improve interoperability issues and ultimately expand business opportunities.

Released as an open source and an open standard project, this “open” approach adopted for the RDOS represents a fundamentally new and pioneering initiative for a risk industry accustomed to proprietary data standards. The industry recognizes the need for openness and collaboration to tackle data interoperability problems and increase adoption and innovation, and the “open” approach has been proven to be the best way to unlock new collaboration among industry participants. The open source method has worked successfully in many fields, especially when the problem domain is engineering a standard data exchange (like HTML or JSON) or data processing and analytics (like Hadoop and Spark).

RDOS is a “superset” of existing standards such as EDM, RDM, OED, and CEDE, that modernizes risk data into an extensible, risk model agnostic, vendor agnostic, single (unitary), and complete containment with all exposures, losses, contracts, structures and domain data in one package.

One of the major drawbacks with current data schemas is they are predominately focused on property risk – existing data models are rigid and difficult to extend to new classes of risk and associated coverage. The RDOS, in contrast, supports the capability to add new lines of business beyond property catastrophe, in a modular way that does not interfere with existing lines of business.

The extensibility of the RDOS schema also empowers open modeling and the ability to customize a personal view of risk. For instance, using the RiskItem entity (see figure below), which already includes the subtype RealProperty, this can be extended to new subtypes that represent new lines of business, like aviation, or offshore energy. Existing attributes, like RealProperty attributes, can be extended to define new attributes that may support advanced analytics or other internal system operations.

With the RDOS, you are not restricted to a particular database technology, it is a logical data model, meaning that it provides schema specifications and business rules to standardize the data model independent of a specific database technology. You are free to choose the database solution that best meets your organization’s needs, depending on your access patterns, performance requirements, and scaling needs. Users can select from several technology options, including Object-Relational, Relational or a simpler Interchange format such as JSON.

How to Get Started with RDOS

It is simple to access the RDOS, register to create an account with GitHub if you do not already have one, and use this link to navigate to the RDOS: https://github.com/RMS-open-standards/RDOS

By accessing the RDOS Repository on GitHub, you agree to an Apache Licence 2.0, which is a straightforward, widely used open source licence that grants access, usage and modification rights for private and commercial use.

To contribute to the RDOS, participants simply need to access RDOS via GitHub at this link: https://github.com/RMS-open-standards/RDOS, complete and sign the required Contributor License Agreement, and add their contribution – whether it is creating a new branch or a data subtype, implementing a new feature or fixing feature(s) as desired, and then provide comments so that others can understand your feature. The RDOS Contributor License Agreement is based on the Apache Software Foundation Contributor License Agreement, and it is necessary for providing reliable and long-lived open source projects through collaborative open source software development. In all cases, contributors retain full rights to use their original contributions for any other purpose outside of RDOS.

The ongoing development of the RDOS is being guided by the RDOS Steering Committee, which is composed of industry experts from leading companies. The committee meets regularly to review and approve/disapprove RDOS contributions that may be added to the standard.

If you are a developer, a risk modeler, a data analyst – or if you are from outside of the risk industry and want to explore the RDOS, there is a wealth of documentation available and a microsite which explain the RDOS in more detail. If you are already familiar with working on open standards, please explore via GitHub, and come join the party – it is time to create something amazing together.

New Ways of Modeling Property-Liability Clash and Uncovering Hidden Risk

Natural disasters and other large catastrophes can trigger huge economic losses potentially among multiple insurance lines. RMS, in collaboration with research partner Cambridge Centre for Risk Studies at University of Cambridge, have developed eight template scenarios that model liability clash triggered by natural or man-made catastrophic events.

This research was primarily focused on property–liability clash modeling and was the continuation of the two-year Global Exposure Accumulation and Clash (GEAC) project. GEAC laid the foundations for a risk data schema for the various insurance lines, as well as an approach to modeling insurance clash among life and non-life insurance. Please see here for more information.

The project resulted in liability loss assessments for various scenarios including natural catastrophes, cyber and terrorism (see Figure 1 below). Although these scenarios are extreme, they are well within the realm of possibility and are aimed at stressing the various types of liability insurance.

Figure 1: GEAC Scenarios
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Coronavirus Event Cancellation Risk

In the spring of 2003, RMS pioneered quantitative event cancellation risk analysis with a study for FIFA in respect of the 2006 World Cup in Germany. As it happened, SARS was first reported outside China in February 2003, and was rampant throughout the duration of the risk analysis. At that time in London, as in Asia, sensible precautions such as avoiding busy Chinese restaurants was a rational defensive measure. Since the World Cup was scheduled for three years later – the summer of 2006, SARS was not considered as a cancellation risk. Terrorism was the primary risk to which investors in Golden Goal Finance Ltd were exposed.

Thanks to intensive global contact-tracing, and the need for an infected person to be symptomatic before being contagious, the World Health Organization was able to declare the SARS outbreak contained in July 2003. Nearly seventeen years after SARS, a novel coronavirus related to SARS appeared in China over a month ago in December 2019. Whereas SARS had a case fatality rate of about ten percent, the novel coronavirus (2019-nCoV) is more benign. The case fatality rate is currently estimated at just a couple percent. But even this level is highly disruptive, and all risk stakeholders will be anxious over the number of months before 2019-nCoV is contained.

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