Black Swan or Gray Rhino? Post-Covid Lessons for the Insurance Sector

Yashika Maheshwari
May 27, 2020

The novel Coronavirus is being extensively referred to as “the black swan”. The terminology is important because if Coronavirus was unforeseeable, nobody can blame the insurance sector for not preparing for such a risk.

Four months ago, the novel Coronavirus was so unreal that skeptics called it a “hoax”. The tone is very similar to those who have repeatedly called Climate Change “mythical” “non-existent” and “an expensive hoax”.

Four months since, Coronavirus is as real as it can get. The whole world has been caught out and is stuck in a limbo. No one knows what will happen tomorrow. Be it an individual, a company or a country, we consider insurance to be an essential step to being equipped to deal with a crisis. However, when the entire world is dealing with a crisis at the same time, the insurance sector will be spread too thin to cover us all.

There have been numerous reports of the insurance companies’ failure to pay the claims related to Coronavirus by taking a defence that the contracts either implicitly or explicitly exclude pandemics from the insurance coverage. While some of the regulatory authorities are trying to make it compulsory for the insurance companies to pay these claims and some customers have approached the courts against the insurance companies, it is a systematic failure on part of the insurance sector that has led to the current situation.

Is Coronavirus really a black swan or is it a gray rhino?

The novel Coronavirus is being extensively referred to as “the black swan” by the media and investors, meaning an unforeseeable or improbable risk. The terminology is important because if Coronavirus was unforeseeable, nobody can blame the insurance sector for not preparing for such a risk. As a result, the widespread failure on part of the insurance companies to pay the claims has already been categorized as a one-off event.

I don’t agree with the “black swan” analogy and would argue that Coronavirus is actually a “a gray rhino”, a metaphor coined by risk expert Michele Wucker to describe “highly obvious, highly probable, but still neglected” dangers. The reason behind this are two fold: first, in 2013, in a poll of insurance executives, a global pandemic was voted as the biggest risk to the industry which means that the industry was aware of the risk. Second, epidemics are not new and are likely to become more common in the coming years according to experts. This can also be seen from the fact that in the past 20 years, the world has already dealt with epidemics like SARS, Swine Flu, Ebola and Zika Virus while earlier, epidemics of such proportion were spaced out over a century. So clearly the insurance sector has been aware that a global epidemic was likely for more than half a decade now.

It is very important for the insurance sector to understand the kind of risk the world will be facing, as an individual, country or company as it allows them to develop products to address such risks. Mistaking a grey rhino for a black swan has resulted in the insurance sector missing a sign that will cost them billions. Had the insurance sector grabbed onto the opportunity, they would have made right products at the right price available in the market. For example, previously while most insurance companies were not selling a contingent business insurance coverage which included virus and pandemic, the ones that were selling it, were selling it at a price at which it was impossible for a small company to buy. Had the insurance company recognized and encashed this opportunity earlier, today they would not only be in a position to pay such claims but would have escaped this crisis unscathed.

Is Coronavirus a warning?

I am sure that the next question that comes to your mind is that if the insurance sector was aware of the risk, why did they not do anything about it? Why did they not explore the opportunity of building a suitable product? It’s because they did not consider it a big enough opportunity. They were skeptical about its probability. Does this sound like another cataclysmic event that the insurance sector is skeptical about and has accordingly not prepared for? Yes, Climate Change!

Much like the Coronavirus pandemic, the insurance sector has had enough forewarning about the same as climate change is being repeatedly called as the greatest threat to humanity by scientists and the international community. Accordingly, I think it’s time that the insurance sector starts preparing for the future by making climate change a consideration for all types of insurance because the Coronavirus crisis has clearly shown us how unprepared the insurance sector is while dealing with unexpected changes.

I hope that Coronavirus acts as a wake-up call to the insurance sector and they are much more equipped to deal with Climate Risk because like we say at Blue Sky Analytics “If the decade 2020 is a movie, Coronavirus is just the trailer, wait for the climax where the real villain of Climate Change shall make its appearance”.