Risk modelling and ERM in the post-COVID risk landscape

Frieder Knüpling, SCOR’s Chief Risk Officer, shares his thoughts on the pandemic in ASTIN’s annual report


Enterprise Risk Management has come a long way since the early 2000s, when the International Association of Insurance Supervisors first documented an approach to the rating of an insurer based on its unique risks. Following the introduction of Solvency II, the (re)insurance industry has now universally accepted the use of enterprise-wide risk models, in addition to other tools and frameworks in an integrated enterprise risk management system. This ensures that, as (re)insurers, we can fulfil our role of facilitating economic and societal resilience to major events. However, COVID-19 has reminded risk managers of the need to remain humble, and particularly of the importance of being better prepared by looking for unexpected outcomes in any given event. 

Pandemic events like COVID-19 are not a new risk for a (re)insurer. As such, they cannot be considered as emerging risks, as we have models to quantify losses from pandemic events caused by viruses similar to COVID in terms of lethality and infectiousness, and indeed by viruses that are much worse. Before the emergence of COVID-19, it is fair to say that a pandemic was considered a major event for life and health (re)insurance portfolios, and that although economic impacts were predicted, these were considered secondary in comparison to the potential losses to human life. However, during the COVID crisis, we have seen this assumption being turned on its head, as many governments imposed lockdown measures to attempt to prevent human deaths and to protect “frontline” workers. 

One of the lessons we can take from this is that our society has placed more value on human life than we may have assumed in the past. We have also underestimated the amount of economic pain and the restrictions to our personal lives that our societies have been prepared to accept in order to avoid an even larger number of illnesses and deaths from COVID-19. In many ways this is a wonderful revelation - but as (re)insurers we need to think through the implications, which are having a profound impact on our risk universe. 

The experience of COVID is showing us that pandemics can have very complex and long-term consequences on several areas of the risk universe. For example, the fault lines that exist in our society have been exposed, with the inequalities in people’s access to healthcare, to digital equipment, to sufficient living space and to secure employment being clearly demonstrated. Impacts on people’s mental health caused by these stresses, in addition to those created by feelings of fear, social isolation and of being overwhelmed by juggling family and work, are causing another raft of issues, the full effects of which are yet to be seen. But already, in some countries, the extra stresses placed on people during the pandemic have resulted in an increase in the abuse of illegal or over-the-counter substances such as opioids.


Woman masked


Another major ERM concern is the increase in exposure to cyber threats, which have been amplified during the COVID crisis. As we see cyber attacks becoming increasingly sophisticated, we cannot afford to lose sight of the threats to companies - and to societies - related to an increased reliance on digital equipment and networks. This has of course been necessary during the pandemic, to continue both economic activities and to maintain social contacts, but the innovations in the digital area that have proliferated during this period are likely to continue, along with the associated risks. 

On the positive side however, the pandemic has also generated a renewed spirit of innovation and collaboration. For example, it has been inspiring to witness the sudden shift to a much more flexible and agile way of working, both transversal and collaborative, sometimes spontaneous and bottom-up, and highly solution-oriented. Maintaining this spirit after the crisis will enable us, both as (re)insurers and as members of society, to achieve goals faster and more effectively than ever. 

Looking to the immediate future, and hopefully towards the tail of the COVID-19 crisis, the trends of most concern to the (re)insurance industry will be the continued impact on the health and lives of employees and insureds and the immediate economic fallout and recovery. Dealing with longer-term credit risks and other economic scarring, restoring the public perception of the industry in relation to recent and ongoing coverage disputes, and looking at how (re)insurers can help societies as a whole to become more resilient to future threats, will all be equally important. 

However, as the (re)insurance industry deals with the short to medium-term fallout from the pandemic, it will be important not to lose sight of other major developing risks that we currently face as an industry and as a society, such as climate change and the degradation of the planet’s life-support systems. The pathway that humans collectively choose over the next five to ten years will determine whether we can avoid a catastrophic outcome and leave a habitable earth for the generations to come. (Re)insurers will continue to contribute to the way that this is addressed, both through our actions and active engagement with science and the public, and by ensuring that we can manage our specific related financial risks. 

As we move past the COVID-19 pandemic and into the future, we need to take the lessons from this experience on board. From an ERM perspective, it’s incredibly important that we see the risks to which we are exposed as an industry in the context of the entire risk universe, that we remain aware of low probability but high velocity threats when conducting scenario analyses, and that we take this broad and interconnected vision into account in our risk management frameworks. 

In the wider context, I hope that the pandemic will be followed by a strengthening of international cooperation on issues that cannot be solved by individual states, including climate change, hunger, poverty, access to vaccines and other healthcare, and pollution. Only globally concerted action will provide a chance to manage and mitigate these problems. The incredible progress on vaccine developments since the beginning of 2020 has shown what can be achieved with international cooperation and shared scientific efforts. This remarkable success should serve as an inspiration to all our societies and leaders. (Re)insurers have an important role to play in supporting global efforts on these objectives, by fostering economic development, supporting the advancement of science, and helping to increase the resilience of societies. Actuaries will be a key part of this, by not only providing the toolkits to understand these challenges, but also by actively participating in the discussion and adjusting their approaches where necessary.

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