Best Sees Pandemic Highlighting Weaknesses in Insurers' ERM Programs

The COVID-19 pandemic underscores weaknesses in insurers' enterprise risk management (ERM) efforts, according to a new special report from A.M. Best.

The report notes that while ERM has evolved rapidly over the past decade, the pandemic has emphasized that "unknown unknowns" and "unexpected accumulations" that can affect insurers and reinsurers still remain.

While conventional wisdom held that the greatest impact of a pandemic would likely be to the life and health sector, in fact, it appears that property-casualty (re)insurers will feel the greatest impact of COVID-19. "In turn, COVID-19 is testing insurers' ERM approach, practices, and resilience to current market conditions," A.M. Best said.

Reinsurers and some insurers have thrived on globalization with limited barriers to entry, A.M. Best said, but the effect has been to increase interconnectivity of risks between markets and participants. The result is a higher risk of contagion between insurance and other sectors, the rating agency said.

"As risks become intertwined in increasingly complex relationships, insurers cannot expect to be immune to economic slumps and supply chain disruptions," the report said.

While modeling for pandemics has become more sophisticated, the accuracy of those models had not been tested before COVID-19, and the development of those models remains inferior to that of models for natural catastrophes such as earthquakes and windstorms.

"As the insurance industry responds to the COVID-19 pandemic and adjusts to operating in the new environment, weaknesses in the identification, measurement, and management of risk within certain products and markets have become clear," the report said. "Observers expect the pandemic will rival the insurance market's biggest historical loss events."

A.M. Best said that it will take great interest in how insurers use lessons learned from the pandemic to strengthen their ERM frameworks against future black swan events.

Despite the weaknesses the pandemic has demonstrated in the ERM programs of many companies it rates, A.M. Best said it doesn't anticipate that this particular factor will lead to a material number of rating actions.