In the wake of Covid-19, concerns regarding the solvency of insurers have been raised by both regulators and market participants.
Modelling exercise done for the insurance industry concluded that the annual risk of an influenza outbreak on the scale of the 1918 pandemic lies between 0.5% and 1.0%.1 That’s between a 1-in-200 and 1-in-100 year event in absolute terms. It is estimated that about 500 million people or one-third of the world’s population was infected by the virus that caused that pandemic with the number of worldwide deaths estimated to be at least 50 million.2 It is too early to tell whether the Covid-19 pandemic will reach the same proportions as that of 1918, but what we can say for certain is that no one saw it coming.
It is natural that in the wake of Covid-19, concerns regarding the solvency of insurers have been raised by both regulators and market participants, especially considering the related financial market volatility. After all, the primary role of insurers is to protect society against exactly this kind of low probability, high impact event and offer a cushion against the fallout. But when the event in question is affecting the entire world almost simultaneously, the usual rules are harder to apply.
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