COVID-19 and Insurance Economics: Resilience and Risk in the Connected World
The effects of COVID-19 on the U.S. economy have been dire and far reaching. National gross domestic product (GDP) is forecasted to contract 30% 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% as liquidity is prioritized, leading to a 27% 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 toward digital distribution and sales. Peapod, the online grocery service that reported an increase of 150% in order volumes in recent weeks, believes enough in the future of digital distribution that it’s investing in a 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 consumer 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% of respondents were looking to make more products or components in the U.S., compared to 45% 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%. Usage is up, but so is the nature of online activities. VPN usage has dramatically increased, and 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 after 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 from the 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-ballot 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 who 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.
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A version of this article previously appeared in Insurance Innovation Reporter.