“Friends are proved by adversity” Marcus Tullius Cicero.
You must have read, in some posts or articles, during the last few days in different countries in the world, more or less direct, more or less violent accusations against “insurers” because of the COVID-19 crisis.
The current crisis and its economic and social consequences are indeed exacerbating not only concerns (which seems quite understandable), but also triggering search for “responsibility” if not for the causes of COVID, then at least for the economic treatment of its effects.
As the most demagogical points of view have the “magic” of sometimes being the most shared in social networks, we have thus heard, many injunctions against insurers, who are supposed to “have to dip into their pockets to finance the charge of operating losses”, “to participate first and foremost in the nation’s effort” etc… etc…. the list is long!
To reiterate what you have been all knowing for a long time: the fundamental mechanism of Insurance is to manage risk by pooling the risks and the insured, through an appropriate formulation of the guarantees underwritten. This very old mechanism is unfortunately not necessarily understood by the general public as one of the most obvious forms of the economy of sharing, but as a source of lucrative activity integrated into the “world of finance”. If the understanding of the reverse economic cycle of our sector is certainly not so obvious to the people, it seems even less well understood by some politicians. We often experience their lack of understanding of the principles and even the role of our sector, for example during the debates that preceded or followed some reforms, but the current crisis reveals this even more.
This crisis stigmatizes a huge gap between two worlds
The world in which we manage risk and mutualization through actuarial, statistical and legal rules for the greater good of all (the insured is protected from “twists of fate” and the insurer remains solvent); and the world in which they are considered as mere concepts.
In normal times, an insurer has operated its mutualization rules which lead to generate a balance between premiums collected and probable claims charge (this is the famous golden rule of insurance: probable present value of the insurer’s liabilities equals probable present value of the insured’s liabilities). It has not included in its mutualization calculations any risks that are not underwritten, not invented or not requested by its members.
The problem of the concept of operating loss without damage is a blatant example of the misunderstanding of the very notions of mutualization and insurance by politicians. The fact that these policies primarily insult professional hazard operators, and not other economic actors, is proof that they do not master this concept.
In the event of a crisis, uncertainty disappears, and with it mutualization. Managing a global or health crisis is not the job of an insurer, it is the role of states and public authorities.
The slayers of our professions seem once again inspired by this urban legend that we can mutualize ad infinitum, even by changing the rules of the game, or that there are gigantic accumulations of profits among insurers.
If it were necessary to identify the economic sectors that have super profits in normal times, in order to pool them with losses in times of crisis, it is likely that the insurance sector would be one of the last to be targeted. It should be noted, for example, that the GAFAMs did not rush into the paths of insurance mutualization, no doubt for fear of too low returns due to excessively strong prudential and supervision rules.
I also note that those who are most vocal in their criticism of insurance, the organization of the sector or the methods of covering risks are often the first to call for collective, or even state systems of protection and mutualization. And often these same people, who call for more mutualization but less insurance, choose for their own cover the cheapest contracts, whose risk is the least mutualized, to avoid paying for the risks of others…
If I dared, the actuary in me would even willingly encourage these critics to work on ORSA-type scenarios in order to anticipate future crises and quantify in detail the investments to be made over the long term to offset a sudden loss situation: this is the daily bread of our formidable insurance business. Actuaries now have a major role to play alongside the Insurance Federation to make the technical messages more educational, to make the principles of mutualization more legible, and to relay the role of actuarial science within the scientific world.
At a time when only solidarity and a collective sense of purpose can save us from the consequences of a health and economic war, it is worth recalling these few and often forgotten facts about the insurance sector. The current crisis is a tremendous opportunity for our industry to demonstrate its usefulness and its mission of “protecting” our societies, both through its role as an investor and as a protector of economic growth and of individuals and companies.
But just imagining for a moment a world without insurance should be enough to convince the most convinced detractor! I would invite him, moreover, to look at the situation of the populations of several countries where goods, health and human activities are insufficiently covered by an insurance system and to remember that insurance development and economic development are totally correlated.
For the insurer brings security and the serenity of better risk coverage that allows one to look ahead and invest, whether as an individual, a family, an entrepreneur or a manager. It also responds to the need to cover all populations that have less and less appetite for risk. In most “confined” countries, the public authorities made no mistake when they took measures from the beginning of the crisis to stop non-essential activities, explicitly excluding the insurance sector, which is considered essential… a contrario!
We are in a world at war, at war against COVID 19, at war against its economic consequences. And the insurance world is at war to continue to play its role of mutualization between and among its policyholders, with an age-old and fair rule of the game, because these same policyholders have freely chosen the level of cover they wish to benefit from. Each policyholder knows that he can count on his insurer, which complies with to some of the most stringent regulations and controls in the world, to guarantee the payment of claims if the risk materializes.
It should also be remembered that the initial levels of insurance in the various countries are the responsibility of the public authorities and the social security and state reinsurance systems of compulsory cover and that some insurance and reinsurance players belong directly or indirectly to the states. Insurance only complements these basic coverages, when they are non-existent, incomplete or insufficient in relation to needs.
A virus has come to undermine some of our certainties (first and foremost, that of being safe from the risk of a global pandemic that would confine several billion human beings to their homes in a few weeks). We are all a little flabbergasted by the speed of change. I hope that this crisis will bring us back to fundamental values and restore the image of insurance in line with its human, social and economic usefulness.
We will then note, paraphrasing and transposing Cicero’s initial quote, that “ Insurers are proved to be Friends by adversity “.
An article written by:
Pascal MIGNERY
Chairman of the board & CEO at ADDACTIS GROUP