Canadian Underwriter

How insurance will be hurt by a lagging economy

April 20, 2020   by Adam Malik

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The Canadian property and casualty insurance industry is okay — for now. But the longer the global COVID-19 pandemic drags on, the greater the risk that the economic fallout and financial instability will impact the industry’s financial position, warns MSA Research CEO Joel Baker.

“The industry entered 2020 well-capitalized and in strong enough shape to withstand the impacts of COVID-19 for the foreseeable future,” Baker told Canadian Underwriter. “Reinsurance markets remain strong and vibrant and able to absorb much of the brunt.”

However, he added, if pandemic coverage is retroactively applied to commercial business interruption policies that exclude pandemic losses – a reference to political events unique to a few American states – then “all bets are off.”

Either way, no one will remember 2020 as a great year for Canadian — and global — P&C companies, Baker said.  They’ll still “make it through just fine,” Baker predicted. “COVID-19 will be an earnings event rather than a capital event for the market.”

One question on the minds of many insurance professionals is: How bad is this recession going to be?

They’re also asking what a recovery will look like, said Francis Fong, chief economist with the Chartered Professional Accountants of Canada.

“I think both of those things are difficult questions to answer,” he said, explaining that any outlook is dependent on factors not tied to economics. “This is, perhaps in history, the first-ever policy-driven recession we’ve ever seen. It’s not a normal ‘business cycle’ recession. In that regard, the outlook is completely dependent on how long these business shutdowns and self-isolation policies persist.”

The economic hit is directly proportionate to the length of the shutdown, he added.

The longer doors are closed, the worse off Canadians will be, Baker said. And the worse it gets for Canadians, the more of an impact that will have on the insurance professionals placing their coverage. The same goes for the commercial side. As businesses close, so to will the drop in volume for carriers. The pandemic could increase consolidations or endanger weaker companies.

“Auto insurance won’t suffer much due to the lockdown, and many insurers are providing premium relief to policyholders. Other lines of business will not fare as well,” Baker said, adding that even affording deductibles could be a challenge for policyholders.

And what happens if there’s a major catastrophe in Canada, like an earthquake in British Columbia or Quebec — or even a global one? Such an event “would roil the global reinsurance and ILS (insurance-linked securities) industries,” Baker observed.

An ILS allows investors to buy policies, and the money is earmarked for insuring a Cat event. If a Cat event happens during the investment period, the investor’s money pays for event losses. If not, an investor gets their money back, plus interest.

But investor money may not be as readily available during a global economic downturn. And in that instance, Baker said, “the industry would find it harder to recapitalize in the midst of a depression than it otherwise would, and governments are already strapped. In that scenario [i.e. a global Cat event layering on top of the pandemic], I would see some potential failures, but the overall industry would survive.”

Fong is worried by the number of Canadian homes and businesses with a lot of debt heading into the pandemic. Economists were already concerned about debt loads. A pandemic may exacerbate that vulnerability in the economy, Fong said. “The risk related to household debt and, in my opinion, corporate debt — none of those things have gone away. The longer [the pandemic] goes along, the more those vulnerabilities start to rear their ugly heads.”

Fong asks the question: When cash flow issues start to bubble up, will the problems with corporate indebtedness affect the broader economy?

“Ditto for household debt,” he said. “How much longer are people who are laid off going to be able to defer their mortgage payments? All of these questions start to raise other questions, in turn, about the sustainability of those vulnerabilities just prior to this.”

A second wave of the novel coronavirus could inflict greater damage, Baker warned. He referenced the Spanish Flu (and recommended people watch this documentary), noting that the second wave was worse than the first in the United States.

“The worry is that that this event could be long-lived and drag into 2021,” Baker said. “In that scenario, it will be extremely difficult for governments to borrow and fund the economies for the duration and come out on the other side with firepower to re-stimulate the economies. The worry is that it will take a few years to recover, and that there will be many more fatalities, ill people, unemployment, and business failures. The hope is that a vaccine will be found and implemented in 2020 to avert these dire consequences.”

We’re still looking for the light at the end of the tunnel, Fong said. “In the meantime, how long we’re travelling through the darkness is a complete unknown. And the key for governments and policymakers around the world is to protect our economic capacity in that meantime while we’re travelling through the darkness. That’s why we have all these programs being launched, like wage subsidies, grants [and] loans.”

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