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Moments before COVID-19 began its rampage, Netflix premiered a documentary series Pandemic: How to Prevent an Outbreak, presenting a prophetic warning about the risks of a new respiratory virus that could overwhelm the planet within a matter of months.
This was one of many science documentaries where people sat in a room talking about the potential for a new virus to spread around the world. Filmmakers, along with historians, scientists and insurers, each in their own way, made scarily spot-on predictions about this virus devastating the economy and global population. Why, then, did the pandemic seem like such a shock? And why – despite these predictions – did insurers, governments, and most businesses fail to prepare for it?
Despite all the proof, people generally don’t want to believe that these events will actually happen. Because believing it would happen requires action and forethought. Behavioural economists explain this short-term outlook beautifully: we quickly forget lessons of the past, so we underestimate the risks of the future. For this reason, the pandemic should serve as an expensive lesson which motivates us to cope with this type of systemic risk better going forward. The insurance industry needs to work smarter and harder to change offerings related to these low-probability, high-risk events.
When we speak about systemic risk, we mean a specific risk that’s harder to quantify and predict, which sparks widespread losses to the broader economy – for example, pandemics, cyber-risks, or climate change. They’re difficult and expensive to insure against, and therefore are a threat to an economy’s access to capital, and its overall resilience. Therefore, when the impact of the pandemic was understood, the financial burden (coming from too many simultaneous claims) became too big for insurers and reinsurers to cover. So they excluded pandemic risk from their coverages – deeming it ‘uninsurable.’
Lizé Lambrechts, Group CEO of Santam, recently spoke to FA News about how insurance can help lead us to a more resilient future, explaining:
“Systemic risk will continue to evolve into an ever more complex animal. As insurers, we need to prioritise our understanding of these risks and drive the innovation and collaboration needed to help individuals and businesses remain resilient and ensure continued access to capital.”
One way to help individuals and businesses remain resilient is for insurance industry stakeholders to drive awareness around better risk management, to educate individuals and businesses about how they can reduce or prevent these uninsurable risks. Along with this approach, the insurance industry needs to work more closely with governments, scientists and customers to establish better risk management for future systemic risks, to ultimately ensure the world is more prepared for the next time disaster strikes.
As Lambrechts explains: “where risk is unavoidable, governments should use their sizable balance sheets and ability to legislate to form public private partnerships (PPPs) with insurance industry stakeholders, in order to provide some protection. In South Africa, we already have a successful blueprint of such a model in SASRIA [South African Special Risk Insurance Association]. Instead of reinventing the wheel, we believe its mandate could be expanded to provide more protection against the rising risks we face. Leveraging expertise in the private sector would add further impetus to such a model.”
“The reality in South Africa is that many individuals do not have the resources to buy insurance. Yet they are the ones who need it most to keep extreme poverty from their door when systemic risk events occur. Again, the private and public sectors have the combined resources to find a solution; it is already being done elsewhere on the continent,” continues Lambrechts.
A flourishing insurance industry is a crucial cog in a healthy economy because when businesses and individuals have sufficient cover to help them bounce back from adversity, they have the resources and the will to keep moving forward. Ultimately, they have the tools to get back up and build a better, stronger country.
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