Willis Towers Watson predicts up to $13.9bn market loss for BI and contingency lines due to Covid-19

Risk management and broker Willis Towers Watson’s insurance consulting and technology business has revealed that the market loss in the UK for business interruption (BI) and contingency claims, which refers to event cancellation, could reach $13.9bn because of the Covid-19 pandemic, excluding potential BI claims related to the government’s social distancing policies.

Its Scenario analysis of the Covid-19 pandemic report, published this month, marked the impact of the coronavirus outbreak on the BI and contingency lines as ‘potentially significant’, with premium reductions between 7% and 13% in both the UK and US compared to 2019 premium volumes.

Key uncertainties that the report linked to these lines of business include the extent of BI claims – due to the government’s mitigative actions, such as the lockdown regime and social distancing – as well as the confusion surrounding policy wordings and their effectiveness to deliver their intended meanings, for example around the physical damage trigger, explicit pandemic exclusions and coverage for named perils only.

The report further labelled political risk, credit and surety as a ‘high expected impact’ for the London market, equating to a potential market loss of up to $5.2bn.

However, Willis Towers Watson noted a positive impact for the UK’s personal and commercial lines, recording a reduction in losses of up to $7bn. The reduction of 2020 earned premiums in the UK will sit between 0% and 11%, the report added. Profits in this area are mainly derived from motor insurance policies.

Scenario planning

In addition, the report formulated an estimate of potential Covid-19 insured losses across a range of pandemic scenarios that took in to consideration US and UK business interruption, contingency, US directors and officers, US employment practices, liability, US general liability, US mortgage, trade credit and surety and US workers compensation.

The scenarios include:

• Optimistic scenario (return to ‘pre-Covid-19’ state following three months of social distancing): Willis Towers Watson estimates there could be $11bn in Covid-19 insured losses within these selected lines and geographies.
• Moderate scenario (gradual return to ‘pre-Covid-19’ state following six months of social distancing): Willis Towers Watson estimates $32bn in Covid-19 insured losses within these selected lines in the UK and US.
• Severe scenario (health impact approaching the scale of the 1918 flu pandemic): Willis Towers Watson estimates $80bn in Covid-19 insured losses for the same lines and geographies.

Alice Underwood, global leader, insurance consulting and technology at Willis Towers Watson, said: “Beyond its devastating human cost, the Covid-19 pandemic has swiftly upended economic activity around the world. At this point, it appears that the industry-wide level of general insurance loss could exceed that resulting from the 2001 World Trade Centre event.

“Given the potential scale and systemic nature of pandemic loss, discussions about the need for some sort of government backstop to address future pandemic risk have already begun.”

Richard Clarkson, head of London market consulting at Willis Towers Watson, added: “With the world heading towards a recession, the length of which in our scenarios ranges between six months and three years - with falling payroll, GDP, global trade and travel - it has never been more important for insurers to perform a strategic assessment of their portfolios.

“Expected reductions in premium income opportunities, combined with changing risk profiles, will challenge any insurer’s pre-Covid-19 business plans. We see strategic portfolio management as a major area of focus to achieve adequate returns, and indeed profitable growth, over the next three years.”