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Cherry-picking systemic risks is 'a path to run-off' for insurers

The insurance industry runs the risk of irrelevance if it chooses to take only the easy-to-manage parts of the systemic risks facing its customers, according to a panelist at a terrorism insurance conference.

The industry's response to the coronavirus pandemic and claims disputes have focused attention on its role in helping companies and individuals manage wide-ranging societal risks.

Jason Schupp, founder and managing member of the Centers for Better Insurance, said at the annual conference of the International Forum of Terrorism Risk (Re)Insurance Pools that "this is an existential moment for the industry" where it can say it is there to help policyholders manage their risks or say "'we're just here for the easy parts, the manageable parts of those risks, and good luck with the rest.'" He added: "If the latter is the path of the industry, it is a path into run-off, ultimately."

Schupp said that industries outside insurance were capable of playing a role in helping society cope with systemic risks. For example, he said, banks had delivered hundreds of billions of dollars to 3 million small businesses as part of the U.S. government's Paycheck Protection Program "in a matter of about five weeks." He added: "We do see that there are possibilities to deliver pandemic catastrophic relief through means other than insurance, and that should concern us, as insurance professionals."

Wary insurers

Speaking on the same panel, Will Farmer, strategic head of crisis management and special risks at AXA SA unit AXA XL, said insurers also had a responsibility to shareholders to deliver a suitable return on equity and price tail risks appropriately, and that the pandemic had "frightened a lot of big insurers." He said "insurers should man up and address the systemic risks and try and provide solutions for their clients," but added that it was "not realistic" to expect the industry to take all of a correlated risk such as the pandemic, and that a public-private partnership "is a really good way forward on this."

However, the industry may be ill-suited as a distributor of government funds in a pandemic because its claims systems are "quite technical, clunky, there is a lot of analysis and they are not highly automated in most sectors," Farmer said.

"I think possibly the insurance industry is going to be for some of the more specific business interruption type risks but I can't see it evolving into being a good distribution for aid for a pandemic based on the way it is set up at the moment," he said.

Long-term view

Fellow panelist Emma Karhan, head of terrorism specialty and reinsurer relationships at Aon PLC, said that just as the insurance industry needs to change its thinking to address systemic risks, so too do governments. She said that because of the time needed to develop public-private solutions, which could stretch beyond political parties' time in power, "governments are pretty reticent to set up solutions that are going to benefit their political opponents."

She added that "it is really fundamental for the government to start taking a longer non-partisan type view to how we address these systemic risks; otherwise it is never going to work."