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COVID-19 –Insurance and What’s Next

 No one needs to be reminded of how painful the past several months have been since COVID-19 changed everyone it touched forever. Last fall, I attended a meeting conducted by the legendary insurer Lloyd’s of London. In the presentation, there was a great deal of discussion about identifying and prioritizing risks from events that can’t be accurately predicted using traditional actuarial analytics, exciting right? 

Insurance companies shake in their boots when they can’t predict future claims because one uncalculated event can jeopardize a company’s existence. Included in the top five list from Lloyd’s were things like flooding from global warming, natural disasters, political upheaval, cyber terrorism and PANDEMIC. I could accept everything on the list except pandemic and eventually dismissed it as a very remote possibility for some faraway place that I probably couldn’t pronounce.

Despite the Lloyd’s prediction, the insurance industry as a whole never seriously anticipated the far-reaching effects of a pandemic. They were probably wise to do so since there hadn’t been a similar event that seriously impacted the United States for a century and the opinions expressed by Lloyd’s were simply that, Lloyd’s opinions. Instead they concentrated on successfully navigating the pressures of operating in highly regulated and competitive marketplace. After all, the chances of a worldwide outbreak in any given year were infinitesimal. Then COVID-19 happened. 

Overnight, it seemed, cars disappeared from roadways and the number of miles driven dropped tremendously. In a great oversimplification, insurance carriers typically base their rates on assumptions derived from long standing patterns of usage where premiums are calculated (among many other factors) by miles driven. The assumption is that if people drive less, they will have fewer accidents and therefore fewer claims. Unsurprisingly, the assumptions were correct and claims dropped tremendously after the shutdown. Whenever there is a claim, the insurance company must put on reserve an amount of money sufficient to satisfy the best estimate of what might be the maximum potential payout. Since claims were greatly reduced, carriers had lots of cash that they didn’t need to reserve because there weren’t many claims.

Now, I know what I would do with the money if I came into a sudden windfall. I would probably make some impulse purchase of some gadget that I would promptly hide in my garage so as to have plausible deniability. Insurance companies can’t do that because they are, if you were paying attention, a highly regulated and competitive industry. To their credit, before any prompting by regulators or consumers, the insurance companies did something we seldom see: they gave money back. Most insurers in NY State and across the country that I know of, have already announced how and when they would be distributing the money. 

So, in case you were hiding in a cave somewhere and you just got out (talk about bad timing) schools are closed indefinitely, most businesses are closed, you need to wear a mask, you can buy alcoholic drinks to go, you can go to the beach but can’t go in the water, you can finally get to Manhattan from Rockaway in a half hour except there’s nowhere to go and most incredibly, insurance companies are giving money back. It is a bizarre world indeed.

Stay healthy and see you next time.

(John Lepore is the owner of John Lepore Insurance Agency).

 By John Lepore

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