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Five steps for P&C insurers on the path to ‘new normal’ resilience

Insurance Consulting and Technology
Insurer Solutions

June 24, 2020

COVID-19 has rewritten the definition of an extreme insurance event, with knock-on effects for risk assessment, management and mitigation.

As the human and economic losses from COVID-19 continue to accumulate, the insurance world is having to re-assess what an extreme event looks like. Unlike a wind-storm or an earthquake, the event hasn’t lasted a matter of minutes, hours or days, at which point damages can be assessed; it is still on-going with no immediate end in sight. And as countries try different approaches to starting to exit lock-down it appears likely that there will be a variety of impacts to economies and to businesses as well as different rates of long-term recovery.

So, how should property and casualty (P&C) insurers evaluate the impacts on their business? How might they develop a strategy to mitigate the short-term impacts and to deliver longer-term resilience to such deep uncertainty?

In this short article we describe a five-step process that we believe will help achieve these goals. We will cover the ‘what’ to do, the ‘how’ to do it, ‘why’ you should do this, and, importantly, some evidence and practical applications to back up our assertions.

  1. 01

    Re-plan to 31 December 2020 and beyond

    We improve the effectiveness of the assessment process for clients by hitting all the key metrics for success and a strong focus on ROI.

    Insurers are used to having a good idea of what the balance sheet looks like today and a business plan that articulates what they expect to do next. However, the event is still happening and before talking properly about a forward-looking strategy, organisations need to understand where they are.

    We recommend that companies consider more than one scenario for emergence from the current position; probably starting with something based around the government’s currently stated plan, and then thinking about possible variants around that to allow for the release of lock-down perhaps taking longer than desired or perhaps more strict measures needing to be re-introduced. This is likely to need to be considered on a country by country basis.

    For each of these scenarios a re-plan to 31 December 2020 will be needed, together with a consistent forward-looking plan for 2021. The re-plan needs to be at a fairly granular level so that the potential changes to various business dynamics can be considered, articulated and quantified. It would ideally cover:

    • Volumes
      For example, how changes to personal behaviour and economic activity might impact the need for insurance and customers’ ability to pay; changes to purchasing habits impacting new business versus renewals.
    • Premium rates
      For example ,social drivers such as premium rebates; technical versus market price; changes to reinsurance rates; and speed of reaction to increased costs.
    • Direct claims costs
      For example, emerging claims on previously written business (earned and unearned) and changes in claims profile.
    • Indirect claims costs
      For example, delays in claim notifications; delays in claims settlement; and the availability and cost of remediation.
    • Expenses
      For example, the implications of continued remote working; staff costs; overruns on existing projects; and increased risk of operational losses.
    • Investment considerations
      For example, dependency of asset holdings upon portfolio and economic conditions; higher levels of default; and availability of capital.

    Once this step is completed, companies will have a range of views of where the balance sheet might be and what a consistent forward-looking business plan might look like; these will inform the next step.

  1. 02

    Identify the new risk universe

    Whilst many P&C firms would have had a pandemic on their risk registers, it would often have been considered just as an operational risk. Where it was considered as a driver of claims it was modelled, but without the size, depth and breadth of the wider economic impacts that we are currently seeing.

    Our perspective on what a disaster might look like needs to adapt to reflect this new reality.

    At this point in time, for example, we would be surprised for most businesses if the answer to the question - how much capital do you need to support your business? – was that it did not increase. For some, there may even be a question of whether the business model remains viable.

    By bringing together an updated wide range of insights and views from across the business and from external sources, risk and capital teams can help businesses identify the numerous direct and indirect risks to which they may be exposed.

    The risks are likely to span underwriting, claims, reserving, investment, operations, reinsurance, exposure management, regulatory and compliance.

    This is something that has always been done, but the critical difference to before is to re-evaluate the views that were previously held and to see how these views have changed in light of the recent COVID experience.

    And naturally enough, for each risk identified, insurers will need to understand and try to quantify it.

  1. 03

    Design and apply scenarios

    With the base cases from step 1 and the output from the risk and capital teams in step 2, the next step we’d recommend is to overlay the scenarios upon them to understand how these may affect the business.

    The previously existing suite of tests will need to be updated to reflect the direct impact of the updated thinking, as well as being developed to accommodate the newly identified risks – forming a new view of ‘normal’ tests.

    For each test, there will be a need to think explicitly about:

    • How has the likelihood changed?
    • How would this unfold, given the pandemic?
    • How will this affect our capital requirement?
    • What implications does this have for the business model?

    As a result of applying the new test suite to the different base cases, this will lead to insights on each of the above points, as well as insurers being able to articulate:

    • How the risk profile has changed
    • What could erode our capital buffer?
    • Whether risk mitigation needs to change
    • The capital they need to hold

  1. 04

    Communicate implications and identify mitigation

    The ORSA (Own Risk Solvency Assessment) provides the key tool for identifying, understanding and communicating the risks to the business and regulator. It forms the platform for future decisions and modelling. Having carried out steps 1 to 3, insurers will be in a position to distil the key findings and to update the ORSA.

    Key benefits will include:

    For the whole business – an understanding and quantification of how the various pandemic scenarios will impact profitability, solvency and the ongoing business model.

    For the board and senior management – understanding how well the business would withstand events which could happen over the next year or longer, together with identification of options available for remediation.

    For the capital modelling team – a clear understanding of where the capital model will need changing and a guide to the extent.

    The range of possible mitigations is wide and might include:

    • Reinsurance
    • Capital raising
    • Future underwriting strategy / portfolio management
    • Investment strategy
    • Market communications
    • Regulatory engagement on solvency
    • Regulatory / government lobbying
    • Areas for increased risk monitoring
    • Application for volatility adjustment

  1. 05

    Update the capital model

    Based on the preceding analysis, it is likely that any changes to the capital model will be driven by three main causes:

    • Additional uncertainty caused directly or indirectly by the pandemic
    • Understanding of gaps in past risk modelling
    • The ‘new normal’ – societal and insurance changes after the event

    There are likely to be two main types of change to the model: changes to the calibration or to the model itself. The ORSA is a critical feed into this step.

    For calibration, it is likely that all risk types will need attention. Many calibrations based upon ‘average’ historical experience will need to be re-visited. This process will require extensive expert judgement.

    For the model itself, the fundamental question is whether the current models are set up to capture the wide range of effects of the pandemic. Where they are not, the issues will be the best way to introduce this feature into the model, and the changes that might be needed in the future.

    By their nature Solvency II solvency capital requirement (SCR) calculations are not good at responding to major changes in the general level of future risk. In the case of internal models, model change policies will typically limit the amount of changes that can be implemented by a firm. The process of implementing and application for a major model change typically takes around 12 months, and any short-term changes may be difficult to retract.

    Standard formula firms are in the position where very few calibrations adapt to the changing environment and a considerable consultation process is required in order to implement any changes.

    The implications for these two different SCR models, however, are similar. There is likely to be a significant shift in the gap between Pillar 1 and Pillar 2 capital. As a result, companies are likely to have to operate two (or more) model bases and will need to have a view on what an appropriate management add-on should be for any deficiencies in the SCR model.

    Clear communication with stakeholders (board, market and regulator) will be critical.

New normal, refreshed resilience

Why do we think this is necessary when, for the most part, insurers have weathered the initial storm of COVID-19 impacts remarkably well? Because the economic uncertainty it has engendered is unlikely to pass any time soon, probably not until a vaccine shows signs of fully quelling the pandemic.

So this is not a time to try and ‘sit out’ the storm. Insurers that make decisive moves to adapt to the so-called ‘new normal’, along the lines of our five steps, should put themselves in a more resilient short- and longer-term position.

For further information, or to discuss the content in this article, please contact your Willis Towers Watson consultant or any of the authors.

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We support clients with consulting and technology solutions that fully integrate risk assessment and mitigation in to business strategy and day-to-day operations. Advanced risk and financial modelling capabilities are central to enterprise risk management services that address a full spectrum of issues from risk culture and appetite to mitigation and transfer.


Gavin Hill
Director – Risk
Insurance Consulting and Technology

Paul Hewett
Director - Risk
Insurance Consulting and Technology

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