The insurance and reinsurance industry is likely facing a larger industry loss from the Covid-19 pandemic than it experienced with the 2001 World Trade Center event, but at the extreme tail-end of probabilities the impact to the market could reach $140 billion, Willis Towers Watson warned today.

In a report filled with large numerical estimates and ranges, the insurance and reinsurance broking group explained that there remains considerable uncertainty over just how large the market-wide loss from the Covid-19 coronavirus pandemic will be.

Alice Underwood, global leader, Insurance Consulting and Technology, Willis Towers Watson, explained, “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.”

The report from WTW provides some estimates for the property and casualty insurance industry loss due to the Covid-19 pandemic, under a range of difference scenarios.

The scenario loss estimates are focused on the UK and U.S. general insurance market and only on key lines of affected property and casualty insurance business. So in no way should these be taken as total industry loss estimates, in fact they aren’t even complete as far as the UK/US general insurance market goes.

But they are another useful indicator for the severity of the financial impact facing the global insurance and reinsurance marketplace, with every estimate a useful input to decision making for the companies affected.

WTW looked at a range of pandemic scenarios, with the related loss estimates focused on the lines of business the broker expects to be adversely affected by Covid-19, which are: US and UK business interruption; contingency; US Directors & Officers; US employment practices; liability; US general liability; US mortgage; trade credit and surety; and US workers compensation.

Under an Optimistic scenario, that sees a return to a pre-Covid-19 state in just three months after the end of the lockdown, WTW pegs the industry insured loss across these lines and geographies at $11 billion.

A Moderate scenario, of a gradual return to normal and six months of social distancing comes with an industry insured loss estimate of $32 billion.

A Severe scenario, with a health impact approaching the scale of the 1918 flu pandemic, WTW pegs its estimate as high as $80 billion of Covid-19 insured losses for the same lines and geographies.

Finally, a Limited Success scenario, the extreme tail, in which the coronavirus resumes spreading rapidly as soon as controls are lifted, with controls then abandoned due to the economic fear caused, WTW estimates an industry insured loss of as high as $140 billion across the lines of business and geographies modelled, driven by US Workers Compensation and General Liability claims.

It’s quite the range of outcomes, from $11 billion to $140 billion, but not a stretch to see how the eventual total from general insurance could get into the upper-half of that range.

WTW also explains that from business interruption and event cancellation alone, the loss estimates range from $1.1 billion to $13.9 billion for the UK and another $2 billion to $22 billion for the United States.

As WTW’s scenario work and modelling shows, the political response and societies reaction to it could be the key driver in defining just how high the eventual industry loss rises. A new kind of social inflation risk perhaps, with embedded political risk as well.

Discussions are underway between industry and governments, on attempts to put a backstop in place for future pandemic outbreaks.

The insurance and reinsurance industry are positioned as experts in these attempts, with the government positioned as the ultimate keeper of the tail and provider of peak risk capital to support the industries ability to sell more coverage on the front-end.

WTW’s report also highlights the importance of portfolio management, saying that effective portfolio management will be a trait of re/insurers that succeed in the coming challenging recovery from and post-Covid-19 world.

Richard Clarkson, head of London market consulting, Willis Towers Watson, said, “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.”

While the figures are focused on the UK and U.S. general insurance market, the reinsurance of these estimated losses will of course fall globally, including to the insurance-linked securities (ILS) marketplace.

For the insurers, differences in how reinsurance programs are structured and wordings are going to drive how much support they receive in paying their share of losses from the pandemic.

The fall-out will likely result in a need to restructure these reinsurance arrangements, as well as renegotiate wordings where inadequate, with well designed reinsurance programs likely to save some carriers from significant pain.

The insurers that demonstrate most rapidly a strong post-Covid-19 grip on their portfolios stand to benefit from the best reinsurance terms, WTW explains.

Those that don’t, could see the terms of their next renewal less favourable.

WTW’s industry loss estimates compares to an estimate from specialist insurance and reinsurance focused equity analysts Dowling & Partners, who as we explained earlier this week said the property and casualty (P&C) insurance industry loss from Covid-19 pandemic related claims alone could be between $40 billion and $80 billion.

As well as an estimate from analysts at UBS, who said the eventual insurance and reinsurance industry loss from the Covid-19 coronavirus pandemic could be up to $60 billion.