Risk management rises to the fore

Risk management rises to the fore
Frederico Casal Ribeiro, head of business development at MDS Group, a Brokerslink partner in Portugal, tells Liz Booth that risk management is on the up as Portuguese companies fight to deal with the Covid-19 pandemic.

How do you feel the insurance sector has responded to the Covid-19 crisis?

The Covid-19 crisis is a world-changing event, distressing the global economic order. The insurance industry is also severely affected. Insurance and reinsurance companies, brokers, agents and regulatory authorities had to reorganise and implement their own continuity and contingency plans to support their clients.
In my opinion, the sector is responding in a very strong way. Actions include:
  • Numerous ongoing learning and clarification sessions provided by insurers, brokers and regulatory authorities
  • Deadline extensions for premiums payments
  • Extended coverage for some insurance products, granting protection for the pandemic
  • Premium reimbursement and discount practices in lines of business that had a substantial decrease in claims
  • Simplified claims management procedures to speed up the process.

Where were the grey areas of coverage most likely to lead to dispute?
The matter that has been most controversial is protection for business interruption (BI). Overall, BI coverage can only be triggered if the losses and/or profit reduction have resulted from a direct material damage occurring in the
insured facilities.
In cases of pandemics, physical damage to physical assets such as installations, machinery are never at stake, therefore the BI coverage will not be triggered. Furthermore, the global insurance market has little or no appetite to offer coverages for pandemic risks.
There are several reasons for this lack of interest. Such occurrences are difficult to forecast, with insufficient historical data and statistics. The potential financial losses are almost impossible to estimate and there are no risk models tested for these scenarios. You cannot measure the unknown.
Despite those difficulties, some insurers provided coverages but they had almost no traction in the market, perhaps due to the lack of awareness of these type of risks. While this is the actual status, we believe that the insurance industry is reacting and will have to respond to this global need.
On one hand, there is massive demand for protection against this extreme adversity, and on the other hand, insurers and reinsurers are gaining nw knowledge and obtaining tools and data analytics they have not had before.
Nevertheless, we believe that the economic and financial dimension required to create insurance coverage for BI triggered in the case of pandemics will require state-backed insurance pools. This type of partnership is not new. The industry has already joined forces with governments to develop workable and affordable solutions for other huge and difficult-to-insure risks, such as those created by flooding, terrorism and earthquakes.

What impact will this crisis have on the insurance market?
The impact is not uniform across all lines of business. There are lines that will suffer more than others. We will see a hardening insurance market with increased rates in lines like professional indemnity, directors and officers, credit, travel and health insurance. But at the same time, we may observe a decrease of rates in auto and workers compensation, due to the reduction in economic activity reducing claims in these lines.
I believe that the role of the broker as a trusted adviser is now more important than ever. The Covid-19 pandemic brings insurance brokers’ duties and obligations into sharp focus, both in terms of dealing with existing enquiries from their clients and the advice they provide on future renewals.
In Portugal, the insurance industry is following European insurance market trends.
In the first semester, however, we were still experiencing the impacts of the pre-pandemic stages of 2020, with an overall premium increase in the non-life branches and a significant decrease in the life branch.
The Portuguese Insurance Supervision Authority introduced some softening measures that had more impact on non-life, allowing policy owners to postpone insurance premium payments, and this will be reflected in premium figures during the coming months.
On a negative note, it is relevant to highlight the recent M&A among general insurers that has reduced the scope of the offering in our market, with less competitive solutions for our clients.

As we head out of the pandemic, are you seeing changing working patterns?
Yes, business leaders now have a better perception of what can be done outside their companies’ traditional processes. Many are beginning to value the speed with which their organisations can move once they change how they
get the job done. The new normal will increasingly be to operate remotely, backed by more technology and digital platforms. Covid-19 is forcing the pace and scale of workplace innovation.

Do you think we will see a shift in supply chain structures?
Yes, I believe we will. Supply chains built on just-in-time inventory will probably be reconsidered, given the way
many have been disrupted. Companies will have to build backups and safety plans, and diversify their suppliers to have less dependency on certain regions, such as Asia.
The possibility of more border restrictions will also drive a move to bring sourcing closer to end markets and more resistance to globalisation.

What about digitalisation?
Covid-19 can be a decisive turning point in several areas. E-commerce was already heavily competing with traditional commerce but the pandemic has accelerated a change in shopping habits.
Virtual health and telemedicine also saw an increase, with carriers making an effort to improve their quality of service to satisfy increasing demand. Finally, the trend for automation will probably increase.
In the insurance industry, shifting to digital tools, investing in digital distribution and developing an effective tech roadmap will be crucial to face the new normal.
Brokerslink is moving in the same direction.
We are finalising a state-of-the-art software tool, built in partnership with Swiss Re Corporate Solutions, that will enable a much more efficient management of global P&C programmes (see story on page pg37).

Are some risks in danger of being forgotten because of the pandemic?
I don’t think so. On the contrary, the current pandemic crisis is elevating the importance of risk management. Businesses were forced to react fast and the ones that had effective risk management, contingency and continuity plans are in better shape to adapt to the new normal. In this sense, risks like climate change and cyber threats were, and are, at the core of a strong risk management plan.