Doug Turk | Managing Director, Specialty| NFP

2021 Update: Insurance, lest we ever forget, is about indemnifying the insured for loss. From its very beginning in an eponymous English coffee house to today’s complex global risk programs, the core of insurance is the model that some insureds, but not all, will experience a loss at the same time. This basic premise has worked fairly well for 300 years until a microscopic virus began its steady march across the globe in early 2020.

As the last six months have proven, we are living in an incredibly complex and interconnected world that has been going through one of the largest and fastest transformations in recorded history. COVID-19’s impact is a result of the global and interconnected nature of economies and trade. The virus has spread from one single host to everywhere in the world. The virus has demonstrated how our world is now deeply connected and interdependent.

For the insurance industry, it was in early March 2020 that the world began to experience a potential “extinction-level” event. Within a few short weeks, the entire US economy and the global economy stopped in its tracks. Losses were not limited to one geography or industry or coverage line, rather – and almost unbelievably – every insured from the local business to the largest global company experienced a loss. Business interruption losses were predicted in the hundreds of billions. No line of insurance was shielded from the impact. The speed at which the losses and claims compounded was mind-blowing; estimates have come in at $110B of total losses stemming from COVID-19 including specific lines like workers’ comp losses estimated at $16B, business interruption at $11B, credit at $4B, D&O at $1.5B. By the end of March, 2020 was already on track to be one of the largest loss years ever. 1

We now know that it wasn’t as bad as we expected. In fact, from an economic and market perspective the effects of the government stimulus and the consumer and business spending have created a perfect storm in market valuations and business growth. Across multiple industries, construction, consumer goods, tech, we see massive growth numbers and it shows no signs of slowing.

Now for the bad news. Markets are efficient and we will see an end to this run. When inflation had the potential of rapid growth, markets retreated, only to rocket to their highest levels when the Fed announced they weren’t concerned about the inflationary growth or impact. From an insurance perspective, we are now starting to see rate stabilization and Hurricane Ida will prove to be a $17-20B event, the largest since 2017. With the average of annual catastrophic losses in the $65-70B range we could be approaching total losses in 2021 in the $100B range. This number assumes that we return to some level of normalcy in the global economy. If, however, COVID-19 infections continue to accelerate and we see the rollback of state openings and increased restrictions, the loss case could increase even more.Insurance, Complex Systems and Hurricane Risk

Why is it so bad? We need to return to how complex systems and insurance interact. The last year demonstrated a few elements of our modern world that define the complexity of our systems. First, the level of interconnectedness of the elements that comprise risk have been organized in new ways that we didn’t see previously. We didn’t ever think that risk was as connected and hierarchal, globally, as has been demonstrated in the last twelve months. In a highly complex system, interconnectedness and interdependence drives the aspect of non-linearity, specifically the concept that 1+1 does not equal 2. Complex systems will amplify these connections so the combined effect can be exponential. One change in the system can spur major phase transitions — situations that realize massive impacts based on these small changes. COVID-19 is a perfect example of a complex system- wide reaction to a change in a basic input: employment and output. In less than 90 days, results of the shutdown of the economy exponentially amplified across the entire globe creating unprecedented losses. We experienced a massive economic phase transition that had never before occurred on a global basis.

So, recognizing the complex system we are all operating in, what does this mean for the insurance industry and insureds, both for the balance of 2021 and beyond?
First, for the industry, the management of risk and risk modeling will need to become based more on the overall global complex system, and attempt to predict how these changes can impact the overall insurance risk and rating model. The utilization of data to understand the interrelated nature of risk models will take on increased importance and relevance. Insurers will be looking to understand how a global risk exposure can impact their entire book and how they can model these risks and losses. For insureds, the same thinking will need to take place. Understanding how risks can impact all locations at the same time and how that fundamentally changes the business will need to be modeled and priced to determine risk-transfer alternatives. Workers’ comp will require organizations to address new risks with different process and technology. Response speed will become a new metric to determine organization resilience and risk mitigation. The backdrop for both the insurance industry and insureds will be the massive losses that will inevitably reset pricing, underwriting and claims. We are entering a brave new world.

For the next year and beyond, organizations of all sizes will be faced with a new set of risks and losses that were not even considered previously. Organizations of all sizes will need to define their risk mitigation and risk transfer strategies to operate in the new normal. Increased premiums, increased exposures and market changes will be the norm. What will not change is the increasing level of interconnectedness across all aspects of economic and social systems. The complexity of the system and its relation to the individual elements will continue to impact us for many years to come.


1 Lloyds Estimates