COVID-19 and Insurance Economics: Resilience and Risk in the Connected World

The insurance industry will be critical to help companies evaluate the comprehensive economics of resilience—balancing operational elements of resilience with the new cyber threat landscape that impacts the management of volatility.

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The effects of COVID-19 on the U.S. economy have been dire and far-reaching: U.S. gross domestic product (GDP) is forecasted to contract 30 percent in the second quarter of 2020, 30 million Americans have filed for unemployment, and in April, Goldman Sachs forecasted that S&P 500 firms will decrease cash spending by 33 percent as liquidity is prioritized, leading to a 27 percent decline in capital expenditures (CAPEX).

Now, as businesses begin to re-open, we expect many leaders to respond with new or reshaped business models that are informed by new perspectives on operational resilience:

  • Demand models: The COVID-19 experience will accelerate the trend towards digital distribution and sales. Peapod, the online grocery service which reported an increase of 150 percent in order volumes in recent weeks, believes enough in the future of digital distribution that it is investing to switch from in-store pickup to dedicated fulfillment centers. Digital servicing has also spread to SMBs, enabling smaller-scale operations to digitalize in-store inventory to meet consumers’ demand for remote shopping and local fulfillment.
  • Supply models: The second area of change will be the re-composition of global supply chains in terms of geography, diversification, and redundancy. Businesses, especially those hit hard by supply shocks due to the pandemic, may consider opting for higher-priced local suppliers in exchange for increased certainty and continuity of goods and services. Japan announced that it would spend $2.2 billion to relocate some of its corporate assets out of China to within its borders or spread throughout southeast Asia. Also, a recent survey by Sikich found that 56 percent of respondents were looking to make more products or components in the U.S., compared to 45 percent last year.
  • Operating models: With the increase in work-from-home practices, technology experts have observed that web traffic across the globe has increased by 25-30 percent. Usage is up, but so is the nature of online activities—VPN usage is dramatically increased; Windows Virtual Desktop and Microsoft Teams applications are also up; Google Meet, Skype, and Zoom are all setting usage records. And many companies around the globe are now considering maintaining work-from-home models post-Covid-19. 

The Economics of Resilience

The pandemic-induced shifts in resilience strategy trade dependencies on human operations for dependencies on the digital, machine-to-machine equivalents. The key is to be aware of the displacement of one set of exposures for another. But are digital interactions unambiguously safer for businesses and consumers? From a human health perspective, it seems undeniable. But safety from a cyber infrastructure perspective is a different story.

Not surprisingly, the common theme to the three trends is technology. Actions to improve operational resilience will increase our reliance on data, analytics, and interconnected technologies. These digital assets will become increasingly valuable and more central to business models across sectors. The untargeted global transmission of NotPetya ransomware in 2017, which knocked networks of myriad sectors and sizes offline and caused billions of dollars in business interruption losses, illustrates how a tightly coupled digital infrastructure is not immune to massive disruptions. The widespread and cross-functional losses resulting from an attack, or failure of digitally interconnected essential services such as power grids, dams, water treatment facilities, and telecommunications networks remind us of the tenuous link between digital dependencies and operational efficiencies. The current support for wholesale migration to analog, paper voting because of the threat of digital meddling may be instructive, if not prescient.

The Role of Insurance

The insurance industry will be critical to help companies evaluate the comprehensive economics of resilience—balancing operational elements of resilience with the new cyber threat landscape that impacts the management of volatility.   

There is tremendous promise in digital connectivity. Technology observers that have predicted the emerging hyperconnected world will not be surprised at the trend, even if the viral catalyst for the acceleration of their vision was unexpected. For the insurance industry, the mandate is clear: we need to increase our capabilities to understand and help manage cyber exposure, at the probability and economic loss levels, and support households and organizations with solutions that are relevant given the evolving 21st century risk landscape.

COVID-19 Highlights the Critical Need for Digital Customer Engagement

Paul Mang // Before joining Guidewire in 2018, Paul Mang served as the Global CEO of Analytics at Aon plc, a leading professional services firm providing a broad range of risk, retirement, and health solutions around the globe. Paul was also the Managing Partner at Avarie Capital LLC, a strategic advisory and investment firm focused on new ventures in fintech. He was a Partner at McKinsey & Company and a leader in its North American Insurance practice. During his 14 years at McKinsey's offices in both Chicago and London, he counseled numerous clients on issues of strategy, organization, and operations. Prior to McKinsey, Paul was on the faculty of the Graduate School of Business at the University of Texas at Austin. His research in technology strategy, entrepreneurship, and innovation management has been published in journals such as Strategic Organization, Journal of Economic Behavior and Organization, Research Policy, and McKinsey Quarterly. Paul holds a doctorate from Harvard University and both an MS in Engineering and a BA in Economics from Stanford University.

Comments (6)

  1. Thanks Paul – this is an excellent point. It’s worth considering that organized crime is also increasingly shifting to technology enabled cyber strategies. Both the US FBI and Interpol have reported significant increases in cyber crime during the Covid-19 crisis. Although the take-up rate of cyber insurance has been trending upward consistently in recent years, most buyer likely have gaps or underinsured exposures (e.g. ransomware). I hope risk managers take Paul’s advice and think about their increased reliance on technology in the context of their insurance purchasing behavior.

    The following article from the Economist provides an example of the reported increase in cyber crime during the Covid-19 crisis globally:
    https://www.economist.com/international/2020/05/16/the-pandemic-is-creating-fresh-opportunities-for-organised-crime

  2. Pingback: ▷ Assurance et coronavirus | La compilation des articles clefs

  3. The article focuses on a topic that has been recently overshadowed by event cancellations and business interruptions caused by covid, but is still a critical and complex exposure to manage, especially for what is likely to become the new normal in this digital age.

  4. Very insightful.
    I read recently that Ponemon Institute finds that 70% of security professionals believe the ability to effectively prevent cyberattack penetration strengthens their security posture, yet only 24% are focused on optimizing prevention capabilities. Insurance will become a key part of this on-going and increasing threat.

  5. In so many ways, the pandemic has fast forwarded us 5+ years into the future. We knew brick and mortar retailers were going to fail. We knew unskilled and physical labor was vulnerable to automation. And we knew we’d need to be more digitally connected. What we seem to not understand yet is how these behavioral changes affect our risk exposure. Lower liability losses due to slip and falls? Great! But those traditional risks will be replaced by 21st Century risks: pandemic, reputation, cyber, business interruption… we are seeing these unfold at an incredible rate before our eyes. How will our industry (and actuarial models) adjust to a world where the past is not a great predictor of the future?

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