Denis Kessler: “This shock could change the course of history”

The Chairman and CEO of SCOR spoke with Le Point about the magnitude of the pandemic and its economic consequences that could change the way we look at the world.

Interview with Le Point. Published in the 16 April 2020 issue.

Major risks are the raw material of the company he runs. SCOR is a leading global reinsurer, and in the galaxy of risks it faces, pandemics have always had a prominent place. While he firmly believes that his group will absorb this major shock, just as it has absorbed many catastrophes in the past, SCOR’s Chairman & CEO Denis Kessler is following the development of this crisis and its consequences closely.


Le Point: Was the Covid-19 pandemic a predictable event?

The probability of a worldwide pandemic is low, but clearly not zero. Major pandemics are once in 100 or even 200-year events. They serve as historical markers. The last true pandemic was the Spanish flu a century ago, which was particularly deadly. Epidemics, which affect just one region of a country or of the world, are more frequent. Examples include SARS in Asia in 2002-2003, Ebola in certain African countries in 2014-2015 and MERS in the Middle East in 2012. Every time an epidemic starts, we wonder about the probability of it turning into a pandemic. There are therefore many scenarios and models, developed by epidemiologists, that project how a global pandemic could develop from a localized outbreak. Indicating the probability of a scenario is one thing, predicting precisely when it will occur and how widespread it will be is another entirely. Infectious diseases figure prominently in the risk maps professional risk managers draw up each year; with a low frequency but very high severity. The probability of a worldwide pandemic increases over time, because globalization fosters population movement. Another worrying development is that the speed at which a pandemic can spread around the world is accelerating, effectively reducing the time available to find a cure, vaccine or treatment.

It took a long time for political leaders to become aware that a pandemic was unfolding…

If there was shortsightedness, it was collective! Virtually no political or economic leaders had this type of low-frequency risk on their radar. Proof of this is the fact that the world’s most prominent leaders, when they met in Davos at the end of January, ignored the risk of a pandemic and instead focused on technological risks (particularly cyber risks), global warming risks, geopolitical risks and the risks posed by increasing inequality, even though the epidemic had already begun in Wuhan. Awareness of the exceptionally seriousness of  the Covid-19 pandemic therefore came both late and slowly. Many people thought that this epidemic, which started in China, would stay there and disappear. Valuable time was lost in terms of adopting and implementing measures to contain the  pandemic in various regions of the world. You can even say that there was a certain level of denial regarding the magnitude of the pandemic. Until people started dying. Then virtually the whole world realized, with mounting anxiety, how unprepared governments and international organizations were for this scourge. That being said, certain countries were far more responsive than others, quickly understanding the enormity of the risks posed by this novel coronavirus. Morbidity and mortality due to the virus accelerated, following anxiety-inducing exponential curves. There was a desperate search for masks, hand sanitizer and ventilators, most of which were unavailable. And lockdown orders came too late in most countries. Overall, public risk management was not up to the job, and we must pay homage to those who have – and continue to – expose themselves to this disease in order to take care of others and save lives.

Can individual victims be insured against a pandemic?

When you die, compensation is only paid to your beneficiaries if you have purchased a specific death policy, for example when you took out a mortgage, or if you are covered by your employer under a so-called provident insurance scheme. Your beneficiaries can also receive a payment if a third party was responsible for your death. For example, if you die in a plane crash or a car accident, your beneficiaries will be compensated by the insurer of the airline or the vehicle. The beneficiaries of the victims of a pandemic therefore receive compensation only if the policy existed prior to the victim’s death. The situation in this respect is analogous to death caused by a natural catastrophe, such as a flood or an earthquake. The French natural catastrophe system only pays for losses to property; it doesn’t  pay anything to the victims’ beneficiaries. In fact, when you think about it, there is no a priori reason why every death caused by a pandemic should give rise to compensation, any more than deaths caused by other diseases.

Could we create a pandemic insurance scheme for businesses so that they can protect themselves against the economic consequences of such events?

Let’s be clear. A pandemic creates mortality and morbidity risks that affect individuals. What affects companies is the handling of the pandemic. To prevent propagation, governments implement measures – such as stay-at-home orders – that restrict freedom of movement and the ability to work. These have major economic consequences. They simultaneously reduce supply and contract demand. The insurance market currently offers no protection against the economic consequences of a pandemic for fundamental reasons: (i) the size of the risk, which could represent several percentage points of GDP, (ii) its non-diversifiable nature (everyone is affected at the same time), (ii) the possibility of adverse selection (only the most vulnerable companies might buy such insurance), and (iv) the great difficulty in measuring operating losses caused specifically by the pandemic. The insured risk, meanwhile, can vary greatly depending on the lockdown measures implemented. Both the advisability and the feasibility of introducing systems to mutualize operating losses seem to me to raise fundamental questions. Should we implement measures to dampen the impact of the crisis on companies? Definitely. Some already exist, such as furloughs and short-term hours. It goes without saying that we should safeguard financing arrangments, especially for SMEs. We should also help limit the number of bankruptcies to prevent the economic fabric of the country from being torn. But I have trouble seeing why and how we could institute a principle of mandatory “national solidarity” between companies to protect them from the risk of a pandemic. Before embarking on such a project, an in-depth assessment is crucial. I make a fundamental distinction here between individuals and legal entities. The principle of solidarity is fully justified between individuals, and everything possible must be done to protect those affected by the health crisis.

Will the Covid-19 crisis be so severe that it could change the course of history?

This crisis will remain a dark page in world history, because of its violence, its power and its resonance. And because of its universal nature. Billions of individuals are now keenly aware of this major risk. From now on, they will feel vulnerable to this type of public health crisis. And that will have an impact on every aspect of their behavior. Their world view will now seem less certain, more fragile, more subject to chance. The political impact of this extreme shock will also be considerable, leading to questions about the role of government, of medicine and of international organizations. Europe could find itself destabilized, with nationalism and protectionism re-emerging. This health crisis is also giving rise to many serious questions about democracy and freedom. Yes, this shock could change the course of history. But it is too early to say how much.

So the worldwide economic consequences will be extensive?

It’s clear that the direct and indirect economic costs of this crisis (lower business activity, unemployment, etc.) will be extensive. In addition, the contraction in economic activity combined with massive central bank intervention and further bloating of public deficits could foster a resurgence of inflationary pressures. This is generally the consequence of injecting “helicopter money” into the economy. For that matter, if this crisis were to lead to protectionism and a decline in international trade, the principal force that has been stabilizing prices in recent years would weaken. Moreover, “post-war” periods are always characterized by inflation. More fundamentally, we will see changes in the behavior of all economic players, with serial effects on both the demand and supply sides of the equation. As individuals and consumers, all of us will change our attitudes faced with the pervasiveness of this new risk. In all likelihood, we will protect ourselves more, consume differently, travel less, etc. For business and industry, meanwhile, this pandemic shock will unquestionably lead to a reorganization of production chains and, consequently, of the international division of labor. Covid-19 has made many companies realize, to their cost, that when certain irreplaceable components are no longer manufactured, because Chinese factories are closed, most or all of their production capacity will come to a standstill. Many companies, particularly manufacturing companies, will therefore re-evaluate the structure, organization and geographic distrbution of their supply chains, their production lines, their distribution networks and their inventories. It is also likely that teleworking will become more common. The sum total of all these impacts - behavioral changes on the part of governments, individuals and companies – could result in changes to the global economic equilibrium.


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