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Like many of you in early 2021, I am still processing the events of 2020 and what they mean for us as insurers and individuals. I hope your families and loved ones are physically and mentally healthy as we move into a new year, with hope for opportunities in 2021 that we took for granted in 2019. COVID‑19 (SARS‑CoV‑2) shaped, and is still shaping, the world. For me personally, COVID‑19 altered my path forward in various ways, many unexpected. That is probably true for the insurance industry and many of you as well.
In emerging from the chaos of 2020, I took away two key lessons that will fundamentally influence Gen Re’s thinking and actions in the coming year:
We may not have all the right responses today, while the landscape is changing so quickly and unpredictably. However, we can take some significant steps now to make us better equipped - as companies, individuals and communities - for handling the challenges ahead.
Here is what is on my mind in the early days of 2021. The pandemic and equality - on every front - play a role, whether leading or minor, temporary or permanent, in most of the issues. Success or failure on one front will influence progress on others.
Businesses are navigating the operational hazards of opening their doors, which leads to another uncertainty: How and when will employees and customers return? A year of financial and personal pain has altered priorities and accelerated the pace of changing life choices. Our insureds’ businesses and our own workplaces will look different in 2021 and beyond, but we don’t know exactly how yet. I know from our own employee surveys that many of my colleagues are wary of a return to the physical office and seek to retain some valued flexibility in their work location and schedules. Many large companies report that a smaller footprint is highly likely as leases renew.1 Reopening safely, whatever that looks like for you and your team, is just the first hurdle.
Almost every line of insurance has been battered by COVID‑19, and we won’t know the ultimate costs for a while. Property, Casualty, Workers’ Compensation, Employment Practices, D&O, E&O, Life and Health...even those sheltered from the wind have been rocked by the waves. Lingering health effects and new virus variants are still appearing, and we have yet to encounter the full brunt of liability that may emerge from activities in 2020. A vaccine will mitigate the exposure, but it won’t stop claims and coverage litigation from playing out. The price tag may prove too high for many businesses (including insurers) to survive, and who is left standing may well depend on the actions of courts and legislatures that may not have a complete grasp of the consequences of some of their decisions.
While the impact is hard to see year over year, the harsh reality is that over time we are insuring a different earth than we previously thought we were. How do we underwrite and price for this incremental yet inexorable growth in risk? Will regulators look to insurers to continue writing in high-risk areas and influence the corporate and consumer behaviors that feed the warming? Ultimately climate change will impact our corporate and insurance footprint as well as our personal actions - in other words, just about all we do, and to a great extent. Insurers often opine that certain events (cyber attacks for one) are “not if but when,” but global warming is the living example. Perhaps that is why climate change is a permanent fixture on my challenge list. We cannot afford to ignore the greatest threat to our planet simply because we cannot see or quantify its impact on risk today. The hard part is determining what actions, as a corporation and an insurer, are appropriate for today and tomorrow.
Our conception of an “economic disruptor” at the start of 2020 did not capture what it means now as we leave it. What matters now for underwriters is understanding how a pandemic altered the demand and supply side of various marketplaces and adapting to a very different and still changing landscape. Would you rather focus on insuring food delivery services or office buildings? Is the answer going to be the same in 2022 or 2025? As is true of any industry, and change in general, those that identify the shifts and take advantage of new opportunities will fare the best.
We at Gen Re, and I hope all companies, are doing some hard work on what equal opportunity means to us and how to achieve it. For us, in 2020 we started with sharing, listening, learning and supporting our teams in various ways. In 2021, we will focus on our processes of hiring, developing and promoting to make sure we are creating equal access to opportunities for the talented diverse group of candidates and associates that are the future of Gen Re. I feel strongly that this is bigger than Gen Re, but we certainly have a role to play going forward. The Black Lives Matter protests of 2020 did not create a new need for fairness, they simply exposed a widening gap that we have not done enough to close. It is clearer and clearer that we have a responsibility today and every day, to our associates, our industry and our communities, to do better. DE&I is a long game, and we are committed to educating ourselves and making real and lasting changes.
COVID hammered home the fact that it’s human nature to underestimate the largest and most unpredictable risks that lurk beyond the ones we confront every day. Before March 2020, could Property and Casualty insurers price for, and get paid for, pandemic risk? Even if we could, our industry does not have the financial capacity to absorb all or most of the costs from a worldwide event that touches all businesses and individuals to some extent. Yet the pandemic makes us wonder what tail event will be next to expose the shortfalls and raise these same questions. What other risk is in our balance sheets that we aren’t pricing for? Do we understand how it could accumulate? Perhaps it will be a new kind of cyberattack on a large scale or a nuclear terrorism event and the destruction that follows. Or it could be legislative action, which we saw when many state legislatures re-opened the statutes of limitations for victims of sexual molestation and thousands of new lawsuits emerged. There is an emotional as well as financial challenge here that defies quantification yet demands a solution, albeit not from the insurance industry alone.
So many of the catastrophes in recent years have laid bare the fact that more assets are in risky places and we do not have good models to assess or price for many exposures. We just witnessed a new all-time high for wildfire size, the third new record in just the past five years.2 The same assets-at-risk equation is true for floods, hail, derechos and other convective storms. I wonder if we can develop truly reliable models when climate change as well as exposure changes are altering the value of our data and assumptions. This is not about failures in the modeling profession, rather emphasizing that our industry needs to better understand that many large and small exposures elude accurate models and pricing, and that this discrepancy underpins under-quantified risk, affecting profitability as well as reinsurance buying decisions.
Gen Re and many insurers have observed a rising trend in insurance payouts and claim costs, along with the likely drivers. Recently we highlighted findings of a correlation between high verdicts and income inequality, suggesting that unstated goals of income redistribution and retribution are pushing awards upward.3 That inequality is no less striking now than before COVID arrived, and the pandemic has only exacerbated the gap. Tackling social inflation is crucial if insurers hope to get an adequate rate for the liabilities they assume. Many factors will influence the ultimate costs that business bear through their practices as well as fortuitous events, but insurers will also need to get a better handle on their actual loss costs and where those costs are going in the future. COVID‑19 could be muting or exacerbating trends depending upon many factors, making them more complicated and less predictable.
Billions of dollars are lined up to enter the insurance marketplace, lured in large part by the perception of a hardening market. While pockets are in turmoil, it certainly has not felt like a hardening across the board. Less clear to me is where and how broadly the new entrants will find profit, at least in the near and mid-term. A hard market lifts all boats, but some of those boats were well below sea level when the market turned. An insurer getting 10% more rate sounds great, but it’s not so great if the business was 30% underpriced to start. Throw in tail risk, nonmodeled Cat and social inflation and we wonder if these new entrants will have the skills, stamina and inclination (you need all three!) to get beyond the short term. Gen Re will celebrate our 100 year anniversary in 2021 (and the 175th year of the historical Cologne Re) and, as many of you know, it takes a lot of hard work and skills for multi-generations of underwriters, actuaries, executives and lots of other roles to achieve such a milestone. I won’t be here in 2121 to see where Gen Re is, but I know we are working hard today and every day to be there for your organizations 100 years from now.
COVID‑19 exposed more individual and interlinked vulnerabilities than Hurricane Andrew, the Savings and Loan (S&L) crisis in North America and the great financial recession combined. It is no wonder that we feel a hangover from 2020. And as many of us in the 40+ crowd know, the hangovers last longer as you age; there will be lingering impacts from 2020 for years to come. With all these concerns for the future, I am clear-minded right now about how very grateful I am for the many opportunities that lie ahead for many of us. I am amazed at what we have accomplished as an organization in a global pandemic and I am fueled with optimism for what Gen Re and the insurance industry can accomplish in 2021 and beyond. All the curves are changing, and it is through motion and disruption that the best opportunities emerge. We are working on getting a better grip on social inflation. Our managers and teams are making inroads on DE&I initiatives. I see a time when business doors, including our own, will reopen and - even if it looks different inside - that brings me relief, joy and energy for the days ahead.
What do you see? We welcome the opportunity to exchange views on what 2021 means for our industry, ourselves and your organizations. I look forward to meeting our North American clients when we can safely travel and see each other in person, either across a conference room table or sharing a meal, exchanging ideas and learning from each other. All of us at Gen Re welcome and appreciate the opportunity to spend time with you more than ever. And as we begin the new year, we are hopeful and excited about being together again in 2021.
