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“When you add it all up, [COVID-19] will be the largest event in insurance history,” Evan Greenberg, CEO of Chubb, told analysts in April.

Coronavirus is a curious catastrophe to calculate. One particularly tricky component is the potential for COVID-19 to compound losses and alter the risk landscape for non-correlating risks.

You don’t need a cat model to know that there will likely be a meaningful disaster somewhere in the world this year. Equally, you don’t need to be a cat modeler to know that whether it’s a hurricane, a wildfire, an earthquake or a flood, the presence of a pandemic could potentially exacerbate the impacts of any natural hazard disasters that might occur.

The question is how the clash with coronavirus might compound losses – and what can be done to de-risk the escalation.

Calculating Compound Catastrophes

Anyone who calculates the cost of catastrophes for a living will be familiar with the concept of “post-event loss amplification” (PLA). Originally coined by RMS following Hurricane Katrina, it has become a recognized term of art among actuarial scientists, along with other subordinate terms also invented by RMS, such as “super cat.”

Post-event Loss Amplification consists of five components:

  1. Economic demand surge – increased repair costs resulting from shortages of repairers and materials
  2. Deterioration vulnerability – increased cost of repairs when damage is left unattended, for example, water entering through a hole in the roof
  3. Claims inflation – increased costs when, overwhelmed by the number of claims, insurers set high “no claims assessor” thresholds
  4. Coverage expansion – increased costs when politicians pressure insurers to expand what’s covered under their policies
  5. Super-cat effects – increased costs when the primary agent of damage goes on to have significant secondary consequences, leading, for example, to long-term evacuations

Concerns of Post-event Loss Amplification

How might the current COVID-19 pandemic affect the different components of PLA, potentially raising the costs of claims? It might be useful to divide up the next few months into two periods: ‘continuing lockdown’ and ‘post-lockdown.’ During lockdown it will be difficult for claims assessors or repairers to attend a damaged property. In this case, we could see claims inflation, demand surge, and deterioration vulnerability.

During the post-lockdown period (which is likely to include the hurricane season), high levels of unemployment in the construction sector should mean reduced pressures on demand surge. However situations of high unemployment after the 2007-2009 financial crisis encouraged ‘two men in a pick-up’ to arrive the day after the disaster to solicit business off the newly damaged homeowner and initiate the involvement of a lawyer through assignment of benefits--all of which substantially raised the cost of claims (and loss adjustment expenses).

Another area of insurance coverage with the potential for inflation concerns is business interruption. Many businesses will be suffering as a result of the lockdown. If buildings are damaged by an earthquake, flood, or hurricane there may be no appetite to rapidly re-open the business and therefore the costs of the interruption will climb. This will likely be the situation for many businesses, like hotels and restaurants dependent on tourism. With no pandemic BI cover, how will the contribution from the natural catastrophe be allocated?

For anyone sheltering in place, if their house is damaged, they may only be prepared to relocate to another secure dwelling, potentially raising the costs of Alternative Living Expense payouts.

COVID-19 is changing risk in unforeseen ways. Accumulations of cruise liners in hurricane exposed ports, or hundreds of aircraft parked in a single airport, represent more hull risk concentration, while liabilities have fallen for cruise ships and aircraft no longer in service.

Situations will vary by peril, by exposure category, and even by date in the year. The challenge here is the same challenge with any type of risk event: the answer cannot be reduced to a single number.

Each event is made up of so many different factors that it can take a while before the full facts emerge. Yet an examination of the full aspects of COVID-19 related PLA give us the opportunity to run mitigation strategies ahead of major natural catastrophes, such as working with insureds to move riskier assets out of harm’s way or gearing up supplies in hurricane-prone regions. So while the range of the Gross “do-nothing” PLA figures may be a quite wide range, by exploring the topics in more detail and taking action now, we can successfully mitigate the impacts of PLA and reduce the effects to levels that would not be atypical in more usual times.

However, the principal message is that until a vaccine for COVID-19 is generally available, the losses from a natural catastrophe may become exacerbated through the consequences of the ongoing pandemic. Actions by the insurer ahead of the loss event may be able to reduce some of these consequences. RMS can also advise on how to consider the impact of Nat Cat + COVID-19 on expected catastrophe risk costs through the end of 2020.

If RMS can be supportive of your efforts in this area, you may contact your local RMS team or info@rms.com. This blog was updated on May 14, 2020, to remove a hypothetical PLA stress test (for hurricane in Florida) as it may have been misinterpreted by some readers as an RMS view of likely outcomes. RMS has contacted media sources that reported on this prior version to request they update their reports.

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Daniel Stander, Laurence Carter, and Robert Muir-Wood

Daniel Stander is the Global Head, Public Sector Group at RMS.

Laurence Carter is Senior Consultant, Capital and Resilience at RMS.

Robert Muir-Wood is the Chief Research Officer at RMS.

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