The COVID-19 cri­sis has re­vealed mas­sive pro­tec­tion gaps

Context10 June 2021

How has the insurance industry coped with the COVID-19 crisis so far? And what lessons should companies, society and policymakers learn from the crisis? Ruedi Kubat (Allianz Suisse) and Ivo Menzinger (Swiss Re) take stock of the situation.

‘Out of the blue, the first few months of 2020 taught us how radically our everyday lives can change.’ These were the opening lines of SIA’s Annual Report 2020. Since then, COVID-19 has become part of our everyday lives. And nobody yet knows for sure how the second half of 2021 will develop. Will we have to get used to wearing masks on the tram and in public places in the future? How many more businesses will be forced to close as a result of the crisis? Will the vaccination campaign have the desired effect? It is not least the many questions remaining that make dealing with this pandemic so challenging. And it goes without saying that it has also had and is still having an impact on the insurance industry. ‘None of us has ever experienced a crisis quite like it before,’ says Ruedi Kubat, Head of P&C Insurance at Allianz Suisse and president of the steering committee of the ‘Pandemic Insurance’ project at the Swiss Insurance Association (SIA). ‘The COVID-19 pandemic is like a wildfire that has spread rapidly across a large number of countries.’

Brought closer together by the crisis

For employees at Allianz Suisse, the first lockdown in March 2020 came as a huge shock. At the start of the pandemic, Kubat says the primary focus was on ensuring that the company could continue to operate and also protect staff. From one day to the next, more than 90 per cent of Allianz employees found themselves working from home. The company’s approximately 130 agencies throughout Switzerland were closed to customers for almost two months. However, Kubat’s conclusion is that employees came to terms with the new situation relatively quickly. More than that: ‘Overall, I would say that we have actually been brought closer together as a company during the crisis.’ This was also the result of a related survey conducted by the company during the first lockdown. The survey revealed that the crisis also presented its fair share of opportunities for the corporate sector. For example, two thirds of the Allianz employees surveyed said that they wanted to be able to spend more time working from home in the future. ‘Change is our constant companion anyway – it will now accelerate a little,’ believes Kubat. In this respect, he says that the crisis provided valuable impetus, highlighting those areas in which the company could become even more digital and efficient in the future. Specifically, digital tools – for example, options for video processing – may also become increasingly important for the sales force. All in all, Kubat draws a positive conclusion: ‘Given the extremely difficult conditions, we are very satisfied with what we have achieved. We have fared well throughout the crisis so far, thanks in part to our broadly diversified business portfolio.’

Far-reaching payment relief

Although Allianz and most other insurance companies have weathered the pandemic relatively well so far, other sectors have been hit hard by its consequences. Many of them are also customers of Allianz. ‘We have shown solidarity with our corporate clients in this difficult situation and granted extensive payment facilities to give them some financial breathing space,’ says Kubat. The company is not alone in adopting this approach: in 2020, the Swiss insurance industry not only made claims payments of about CHF 1 billion in connection with the COVID-19 pandemic, but it also supported a large number of businesses with payment facilities and rent concessions. ‘For example, we offered our customers free payment agreements, waived reminders and debt collection measures and the associated administrative fees, and significantly reduced interest on arrears,’ says Kubat. In addition, he explains that Allianz has accommodated a large number of commercial tenants by offering rent deferrals or concessions, as has been common practice in the industry.

Principles of insurability

Although private insurers offered their customers support in a number of areas, the industry has repeatedly been the target of much criticism, particularly at the beginning of the pandemic. ‘The COVID-19 crisis revealed massive coverage gaps – in particular related to business closures and interruptions of operations,’ says Kubat. This has been a source of frustration. At the start of the crisis, private insurers repeatedly came under fire because they often refused to pay out insurance benefits due to an epidemic or pandemic exclusion in their terms and conditions. This is despite the fact that the economic implications of a pandemic such as COVID-19 cannot be covered by non-life insurance per se. One of the main reasons is the fact that the business disruption hit a large number of industries across a wide geographical area due to the same cause. In addition, in a pandemic different risks interact with each other – including business interruptions, the impact on the global capital markets, mounting medical costs and rising mortality.

For insurers, a pandemic is an ‘accumulation risk’ – i.e. hazards that cause a disproportionate amount of damage simultaneously. ‘The capital requirements associated with this accumulation risk would be so high that effective coverage through the private insurance market alone would require insurance premiums that would be completely unattractive, if not unaffordable, for policyholders,’ says Kubat. In other words, an event such as the COVID-19 pandemic goes against all the principles of insurability.

Versicherbarkeit Grossrisiken

Normally, a number of people pay a risk-based premium, so an individual is compensated in the event of a claim.

Versicherbarkeit Grossrisiken

If, as in the event of a major risk, everyone is dependent on support simultaneously, the insurance principle no longer works.

It actually happens in practice

Ivo Menzinger, Head of Europe/Middle East/Africa for Public Sector Solutions at reinsurer Swiss Re, is keen to emphasise this: ‘The economic impact of a pandemic is something that cannot be insured by the private sector alone as a matter of principle.’ The past months have revealed what a lack of coverage means. The pandemic has shown the importance of society’s resilience,’ emphasises Menzinger. ‘Although we knew in theory the implications of this sort of incident, society took only limited precautionary measures. This is something that we will have to reconsider in the future.’ Menzinger believes that the COVID-19 crisis has opened many people’s eyes: ‘We have learned that these rare events are not confined to theory; they actually happen in practice.’ He says that it is now up to society to determine how Switzerland wants to react to a pandemic or another major event. ‘We have a choice: either we learn the valuable lessons from our experience of the past few months – or we make decisions on an ad hoc basis again in the future,’ says Menzinger. The current situation represents a huge opportunity. ‘True to the maxim “never waste a good crisis”, we should now seize the opportunity to make a difference as a society.’

At the beginning of the pandemic, it seemed as if the Federal Department of Finance (FDF) wanted to seize the opportunity, launching the federal Pandemic Insurance project. As SIA project manager, Menzinger represented the insurance industry on the project. In autumn 2020, the working group comprising representatives from administrative authorities and the insurance industry completed its work and submitted it to federal councillor Ueli Maurer. On 31 March 2021, however, the Federal Council announced that it had no plans to pursue the options proposed, citing an alleged lack of support in the business community. This decision makes no sense to the private insurance industry. ‘It contradicts the current National Risk Analysis of Disasters and Emergencies,’ says SIA director Thomas Helbling. Although the current situation has revealed massive gaps in coverage, he says that the national government appears not to be willing to learn its lessons for the next pandemic. ‘Instead of countering the biggest risk to society by planning proactively, the federal government’s decision suggests that it will continue to rely on an ad hoc solution for victims in the event of another pandemic,’ says Helbling. It goes without saying that this route is rejected by the insurance industry for regulatory reasons. Instead, it is focusing on a precautionary approach. This, however, requires the involvement of all players involved. For Menzinger, there is no doubt: ‘Pandemic insurance must be a real act of solidarity. A very high insurance penetration rate is needed to achieve a comprehensive protective effect.’ This means that from the perspective of the private insurance industry, policymakers still have work to do and must put the necessary overall conditions in place.

Pandemic insurance in limbo

In order to cover the risks associated with another pandemic, a joint solution is required from policyholders, insurers and the state.

On 31 March 2021, the Federal Council made the decision not to continue with the concept of pandemic insurance. It does not intend to pursue the proposals put forward by the working group. The working group consisted of representatives of the federal administration and the insurance industry, and had developed various proposals for solutions on behalf of the Federal Department of Finance (FDF). The core approach was based on an assumption of part of the claims burden by private insurers. The remainder was to be borne by the state. Based on this concept, the insurers’ contribution would have focused primarily on expertise and claims settlement, infrastructure and customer relations. By deciding not to pursue the concept any further, the Federal Council is signalling that it does not want to counter the biggest societal risk with a precautionary plan. The Swiss Insurance Association (SIA) remains convinced that everyone – including the Federal Council – has an obligation to find a solution to pandemic risk that is viable for all concerned. Accordingly, Swiss private insurers continue to work for a solution that is better able to absorb the economic consequences of a future pandemic or a government-imposed lockdown.

What’s next?

Despite the cancellation of the exercise by the Federal Council, private insurers are still willing to work on a solution. ‘The insurance industry is interested in and open to providing support in the form of various possible solutions. We have business relationships with almost all companies in Switzerland and the tools to make fast, rule-based payments to those affected,’ says Menzinger. He says that this is also important because when a pandemic hits, time is a factor that should not be underestimated in a company’s survival. The question remains as to what lessons the insurance industry itself should learn from the COVID-19 crisis. ‘Overall, I think that the insurance industry in Switzerland has managed the crisis well so far,’ says Kubat, who is also a member of the SIA’s Non-Life Committee. ‘Thanks to its sustainable business model and its solid capital resources, the industry contributes to the stability of the economy and society during times of crisis.’ Nevertheless, Kubat believes that the sector has catch-up work to do, particularly in communication. ‘We have to formulate our insurance terms and conditions more clearly and make it transparent that the costs of a pandemic cannot be borne by private insurance. This might not always have been entirely clear, which understandably led to frustration and anger among some customers.’ Menzinger also believes that the crisis has shown the industry the importance of clear contractual wording. ‘We don’t want gaps in coverage – but the insurance industry cannot pay for losses for which it has never received premiums.’

This article was published as part of SIA's annual magazine «View».