The global insurance industry has weathered Covid-19 relatively well, but both the industry and its regulators should be using the experience to prepare for future pandemics.
That warning comes in a brief from staff at the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS). The document examined the pandemic’s impact on the insurance sector so far, and concluded that “insurers have generally weathered the catastrophe relatively well.”
According to the paper, the increased death inflicted by the virus has only had a modest financial impact on insurers — the bigger issue was increased claims in other business lines, such as event cancellation, business continuity and travel insurance.
The paper also noted that global insurance regulators have found that, while insurers have seen their solvency ratios fall by 4% on aggregate, they have continued to meet their regulatory capital requirements.
Yet, the fact that insurers have come through this pandemic relatively unscathed doesn’t mean that the industry can afford to be complacent.
Instead, the paper argued that insurers and regulators alike should be reviewing the existing capital rules, along with their approaches to risk, solvency, and stress testing to incorporate lessons from this episode for possible future pandemics.
Most regulatory frameworks don’t set specific capital requirements for pandemic risks, the paper found. Instead, these risks are typically captured in other categories, such as mortality risk.
Yet, Covid-19 revealed that insurers’ risks go beyond just mortality risk.
As a result, the paper said, “Regulatory frameworks, though not necessarily through capital requirements, may consider incentivizing insurers to address other risks that could arise from future pandemics, including heightened market, credit and operational risks, as well as their increased interdependencies.”
The paper also warned that it’s likely that there will be other pandemics in the future, and that they may become more frequent in the years ahead, as new diseases continue to emerge each year and the environment comes under added pressure.
“Climate change is playing a role,” the paper said, noting the “increased interrelation” between factors such as health, climate and biodiversity crises.
Ultimately, the paper said, “While capital requirements can serve as a ‘vaccine’ for insurers against future pandemic risks, booster shots are probably needed in the form of other regulatory and supervisory tools as deeper understanding and experience are gained from the current Covid-19 pandemic.”