The Pandemic Property Underwriting Playbook…Wait a Minute, There Isn’t One?
Much has been said about the many unfortunate impacts of COVID-19 on our world, both personally and professionally, as we adjust to what is hopefully a temporary normal in each of our lives. As underwriters, we are tasked not only with assessing existing exposure as best we can, based on historical experience, but also predicting how this pandemic might affect both frequency and severity trends across almost all lines of P&C business.
The direct impacts of COVID-19 to our property portfolios have already been discussed at length, and that will continue for some time given the financial impact. But what about indirect effects of this pandemic? What about unusual shock losses as a result of the worldwide stay-at-home orders? Even as stay-at-home orders are unraveling, how will the continued social distancing measures affect exposures going forward? These unprecedented but necessary actions have led to a multitude of new exposures that might not be accounted for in our normal assessments of risk and return.
We saw one such case in Florida in April where a large fire destroyed over 3,500 rental cars stored in an overflow lot next to the airport.1 Under any normal circumstances, the daily utilization rate of these rental cars would have seen the vast majority on the road on any given day throughout the year. Due to the recent pandemic lockdown, however, the rental car inventory values (or the number of cars on site at any given time) were multiplied several times over, causing an unintended and unaccounted for spike in exposure.
We are seeing similar spikes in exposure across the country - and airport and arena parking lots used by car rental companies represent only one such type. Similar examples also exist in a multitude of classes of business where COVID-19 may not be the direct catalyst for loss, but rather, the actions taken by governments and regular people have resulted in unexpected risk accumulations. Exposure bases are changing all the time. Other examples include:
- Warehousing Risk and Stock Throughput - Have you modeled the risk based on historical peak or average inventory? Has inventory turnover slowed or even stopped completely? If so, you might have a spike in values exposed in peak Cat zones around the country. How are goods valued – selling price, agreed amount or another method? Has the price of stock risen or fallen due to the demand (or lack thereof)?
- Construction - Projects around the country are sitting idle or moving with a reduced team of contractors. Materials are taking longer to arrive on site or might be sitting on site unused and potentially unprotected. All of this leads to an inevitable delay in project completion.
- Hurricane-Exposed Risk - What is the impact on mitigation and response? We have seen the effects of demand surge result in “loss creep” for the 2017 events, but what would the aftermath of a 2020 storm look like? Adjuster availability should be part of any analysis when thinking through loss adjustment expense. Insurers are likely to face constraints on all types of rebuilding resources, adding to the complexity of adjusting property losses.
- High-Value Cruise Vessels - The cruise industry has come to a halt and the recovery will be slow. With hurricane season approaching, there are unintended aggregation issues in and around Miami and the Gulf of Mexico, where many of these idle vessels currently sit.
- Manufacturing Facilities - With facilities shut down and vacant, or occupied with skeleton crews, unintended exposures emerge from a reduction in maintenance, vandalism, theft and a lack of risk mitigation. Who is there to see if anything goes wrong?
- Business Interruption - How should we be thinking about revenue projections? These figures must be re-assessed in-light-of current social distancing orders as exposure bases could be overstated (restaurants, hotels, etc.) or perhaps even understated (essential businesses) and claims adjusting will prove difficult.
- Supply Chain - Taking food risks as one example, operational changes in meat production facilities improve safety but decrease capacity. More positive tests at plants could lead to closures of other manufacturing facilities.
Whether you are assessing exposure on an individual risk or across a vast portfolio, it is paramount to acknowledge the imperfections in previous underwriting guidelines or pricing assumptions. We must question not only our methodologies but also the accuracy of information to ensure that we account for these indirect, and hopefully temporary impacts, of the global pandemic.
At Gen Re, we understand that risk does not stand still. As it evolves, it is our responsibility to help our clients make the best decisions possible with the information at hand. With each passing day, we learn more about the short, medium, and long-term implications to exposure, which will undoubtedly impact the inherent volatility in our portfolios going forward. As a reinsurer, we are seeing this play out in multiple classes of business around the world. Our goal at Gen Re is to help clients navigate this ever-changing risk landscape as best we can. Give us a call to see if we can help you, too.