One Year Later - Early Pandemic Lessons Learned for Insurance Regulators

Authors Note: This article was prepared and presented in conjunction with the NAIC's 2021 International Insurance Forum. This year’s forum is virtual and is being held May 25-26.  

Red Flag Warnings

We're in trouble. I remember that thought going through my head as I sat in a conference room in Basel, Switzerland, a little over a year ago. I, along with other NAIC (National Association of Insurance Commissioners) members and staff, was attending an Executive Committee meeting of the International Association of Insurance Supervisors (IAIS) in late February of 2020. At the top of the agenda were reports from our colleagues in China and Hong Kong who were dealing with the burgeoning coronavirus at home. I was impressed by the scope and breadth of their efforts to ensure that their agencies were responding to what was clearly a very dynamic situation. There were intensive initiatives underway to understand the contingency planning of insurance companies operating in those regions, as well as preparations by the agencies themselves to operate remotely. But what struck me was the mindset of my Chinese and Hong Kong counterparts - they were not acting like this was a trivial passing event; they were on a battle footing for what felt like a long-term siege. And as news continued to circulate at that very meeting that there was a significant outbreak of coronavirus in northern Italy, that battle felt like it was about to go global.  

Break the Glass!

"Andy, we need to accelerate our contingency planning for a possible pandemic..." I had to shake my head in disbelief as I wrote those beginning words of my email back home to my NAIC COO, Andy Beal. I was still sitting in that same IAIS conference room, slightly reeling from the presentations I had just heard from my counterparts in Asia. It was still pre-dawn in Kansas City, Mo., where the NAIC has its main operational HQ, but Andy, a former Marine, was already up, and within moments of me hitting "send," he had simply responded, "on it."  

Even before the meeting in Basel, we had begun to re-evaluate our contingency planning for a pandemic scenario. We quickly realized that unlike our planning for natural catastrophes and similar events, the "plan" for a global pandemic was vague, to say the least. Over the last few decades, we had dealt with our fair share of Continuity of Operations Planning (COOP) events associated with power losses, technology failures, office closures, storms, and even terrorism-related events. But it had been 100 years since the NAIC, or any U.S. business had dealt with a widespread pandemic and our COOP playbook for such an event reflected the lack of experience.  

But what we lacked in actual experience, we made it up with world-class risk management expertise. We knew that any response would rely heavily on being able to operate in a locked-down environment. We similarly understood that we would need to maintain ongoing communications with NAIC members and other key stakeholders. Finally, we would need to ensure we were making decisions based on the best data and information available. Within days of my email, the NAIC was testing our ability to operate virtually across the organization - something we had never done before.  

By the time March rolled around, our pandemic COOP had real substance to it, our systems had been tested, and our membership had been briefed. And when on March 11, 2020, the World Health Organization declared the coronavirus as a global pandemic, we broke the glass on that plan, and what had been a theoretical exercise got very real, very fast.  

Fear Is the Mind-Killer

“I will not fear.” I repeated those words and those that followed as I was sitting in my home office weeks later preparing for another briefing of our very engaged NAIC officers on the increasing severity of the pandemic. As a self-avowed sci-fi nerd, I had read Frank Herbert's "Dune" series early in my childhood and had always taken comfort in the "Litany Against Fear," which was uttered as a ward against a panicked mind. "Fear is the mind-killer. Fear is the little-death that brings total obliteration..." Fear was in heavy circulation in the early days of the pandemic as we heard of lockdowns, new outbreaks, and increasing death tolls. Rumors were rampant as to the source, severity, and duration of the pandemic. In the absence of real data, we were finding that vacuum being filled by fear. As a result, the earliest efforts by the NAIC and its members revolved around data collection and information gathering.  We fought back fear with facts.

We launched a Coronavirus Resource Center as a central repository and library for the burgeoning actions being taken at a state and federal level to combat COVID-19. On March 20, 2020, the NAIC held a virtual Special Session on COVID-19. The session brought together government officials from CDC (Centers for Disease Control) and HHS (Health and Human Services), as well as private sector experts experienced in pandemic modeling. Insurers and consumers also participated. It was our first effort at a virtual event of significant size and complexity. It was a resounding success and set the stage for the weeks and months to come. We were able to peer through the pandemic fog of war by relying on actionable data and frequent contact and coordination within our membership. It also set the stage for an unprecedented tactical pivot.  

Rally Point — Priority One 

"Pivot" was very likely one of the most overused terms in 2020. And while many organizations responded quickly to the sudden emergence of COVID-19 in early 2020, many struggled with effective responses. The NAIC, however, demonstrated a focused, swift, and targeted plan of action.  

In February, before COVID-19 stormed onto the scene, NAIC members had just put the finishing touches on an ambitious set of strategic priorities for the year. Not surprisingly, a global pandemic was not on our 2020 "to do" list. With March came the increasing reality of the pandemic. At that time, there were mixed views on the severity, scope, and duration of the pandemic. In any number of cases, it took businesses months to ultimately accept the monumental impact of COVID-19 and begin to respond.  

The NAIC senior staff, however, saw the need for a rapid and meaningful response, and with the total engagement and support of NAIC leadership – "Priority One" was born. In many ways, it was our declaration of war against the pandemic. It provided a clear rallying point for our membership in allowing us to focus our efforts and resources on a singular cause. Priority One keyed in on three critical areas: (1) protecting insurance consumers; (2) ensuring the ongoing stability and operation of our nation's insurance sector; and (3) delivering exceptional member service.   

In the months that followed, the NAIC and its members executed on that battle plan with a sense of speed and purpose unseen previously within the organization. As observed by South Carolina Director Ray Farmer, our NAIC President in 2020, in his opening session speech for the Fall National Meeting, the actions of NAIC members embodied in Priority One very likely saved lives, saved businesses and reflected admirably on our state-based insurance system. And while the pandemic was unequivocally an event that could have consumed every bit of our bandwidth and resources, as summer came around 2020 found other ways to cement its reputation as one of the most unpredictable and challenging years in our 150 history. 

"I can’t breathe." - George Floyd

I can't breathe were among George Floyd’s last words as he lay dying on a Minneapolis street on May 25th with the knee of a police officer pressed against his neck for over nine minutes, and were words that echoed across the country in the late spring of 2020. His death set off a furious, and sometimes violent, debate on race in the U.S. For many organizations, including the NAIC, that debate led to significant internal conversations about the still painful, racial divides that exist in our country and inside our companies.

Over half of the NAIC's own 56 members are either women, people of color, come from the LGBTQ+ community, or some combination thereof. Many have experienced first-hand discrimination and racism. We are also aware of the insurance sector's sometimes troubling past with discrimination. The death of George Floyd proved to be a historic inflection point. NAIC membership appointed the Special (EX) Committee on Race and Insurance, the first of its kind in NAIC history. This committee is focused on five critical workstreams and will make recommendations on action steps to better serve historically underrepresented groups.

The Special Committee's recommendations, released earlier this year, set the stage for the NAIC's long-term engagement into the issues of race and diversity. Internally, the NAIC is demonstrating its commitment to lead by example in the areas of diversity, equity, and inclusion (DE&I). Early in 2020, we created and hired for a new director-level position focused on internal leadership development, which aligns with our core strategic focus on developing the NAIC team and improving its culture. We also formed an employee-based DE&I Council empowered to work closely with NAIC management in addressing and better incorporating these issues into our corporate culture.  A critical addition to that NAIC executive management team is our new DE&I director. The NAIC's DE&I function reinforces the NAIC's commitment to creating a diverse and inclusive workplace.  

Our engagement on DE&I, both as a membership organization and as a company, highlights a critical quality that was needed during the pandemic - organizational “flex.” Our focus on and response to the pandemic could very likely have been all-consuming. However, the risk for any organization in focusing on a single front-line issue is that they can miss both opportunities and challenges coming in from the flanks. Maintaining situational awareness and remaining flexible to redirect resources and engagement to emerging critical issues became an essential organizational trait in 2020. Such adaptability also became important in response to developments in the natural environment.  

A World on Fire

"Wow, that's an impressive thunderstorm coming in," I said to my Uber driver as I was getting into the car at the Denver airport and observing large, dark clouds tinged by an orange glow to the north. "That's not a storm, it's the fires," responded my driver. I was awed by the sight. Starting late summer of 2020, my home state of Colorado experienced some of the largest wildfires in its history. Millions of acres were burned, billions in losses occurred, and 22 lives were lost in Colorado alone. But Colorado was not alone.  

If the pandemic never materialized, 2020 would have been remembered instead as one of our worst years on record in terms of natural catastrophe losses across the country. Wildfires consumed the west; the Gulf states experienced the most active hurricane season on record (and the fifth costliest); and a derecho hit the Midwest in August, which rivaled a hurricane in its power and resulting losses. The list goes on.  

It was against this backdrop that NAIC members took their next significant step in engaging on this generational challenge by appointing the Climate and Resiliency (EX) Task Force. This Task Force reports directly to the Executive (EX) Committee and brings a higher profile to the issue, addressing climate risk as a strategic priority for the organization. It serves as the coordinating NAIC body for discussion and engagement on climate-related risk and resiliency issues.  

Task Force members are already considering appropriate climate risk disclosures within the insurance sector; evaluating financial regulatory approaches; investigating innovative insurer solutions to climate risk and resiliency; and identifying sustainability, resilience, and mitigation issues and solutions related to the insurance industry.   

The losses from this historic season struck the insurance sector while the pandemic was in full force. And while the sector in the U.S. has financially weathered these twin-black swan events, it was a stark wake-up call that even our most aggressive stress-testing of the insurance sector may need further refinement to account for an increasingly unpredictable world.  

Light at the End of the Tunnel

As 2020 drew to a close, there was cause for increased guarded optimism in the U.S. Vaccines had been approved and were beginning to roll out in early 2021. The number of COVID-19 cases and deaths continued their downward trend. And ever so slowly, by spring of 2021, we finally felt like the end was maybe in sight - that there was a light at the end of what had felt like a never-ending tunnel. That light also began to illuminate some initial lessons learned for insurance regulators in the U.S. and abroad. This list is by no means final, complete (or even 100% correct) but it does highlight some early observations:

• We’re Not out of the Woods Yet. COVID-19 will continue to impact the NAIC and its members, the insurance sector, and the U.S. and global economy well into 2021 and likely beyond. While the rollout of the vaccine in the U.S. has given us a reason for optimism, there are still significant unknowns related to both near- and long-term consequences of this historic pandemic on operations, insurance company solvency, product design, and consumer protection, amongst others. Unlike previous event-driven events (e.g., natural catastrophes, terrorist attacks, etc.), the scope, duration, and severity of this pandemic still remain unclear, and regulators will need to stay vigilant for longer-term economic, operational, and product ripple effects that may not have been created by past crises.  
• Post-2008 Reforms Proved to be Effective. Following the financial crisis of 2008, global financial regulators worked together to implement lessons learned coming out of that event. While we always knew there would be another crisis that would test our system, we did not know what that crisis would look like, and perhaps just as importantly, whether our "fixes" would work. Based on sector results thus far, the answer would appear to be “yes”. Certainly, the increased emphasis around enterprise risk management, and on the regulatory side, analysis of own-risk and solvency assessments (ORSAs), helped tremendously in instilling increased discipline and focus on risk management, stress testing, and product/operational risk mitigation. So too, improvements to group-wide supervision and regulatory coordination (both through supervisory colleges and at the IAIS) allowed regulators better insights and access to pandemic-related impacts on the sector.  Interestingly, however, in the area of insurance capital requirements, the pandemic highlighted the effectiveness of existing domestic capital requirements (for example, risk-based capital in the U.S., Solvency II in the European Union. Insurance regulation regimes around the globe implemented improvements following the 2008 financial crisis and have performed admirably thus far in ensuring strongly capitalized insurers in the midst of often stressed and volatile financial markets. However, that strong performance may call into question the need for greater standardization of group capital requirements currently being pursued by IAIS members through the development of Insurance Capital Standards.  
• There are Holes in the Coverage Protection Dam. Insurance has been characterized as the safety net for our society, the dam holding back chaos.  If that’s the case, the pandemic exposed some significant gaps in coverage that ultimately had a material impact on American consumers. Most notably, business interruption claims relating to the COVID-19 pandemic have largely been denied because those policies (as well as event cancellation policies) largely excluded pandemics and viruses or had physical loss requirements. NAIC analysis of business interruption insurance nationwide showed 83% of policies have exclusions for viruses, bacteria, and pandemics, and 98% require a physical loss for a claim. We expect Congress will continue to evaluate various possible federal programs to address business claims relating to pandemics. The NAIC has shared a policy position acknowledging that a federal facility of some sort is necessary to manage this risk, and we will continue to offer Congress and other stakeholders' guidance on the development of a federal mechanism.  
• The Insurance Sector is Accelerating its Usage of Data and Technology - And In Doing So Increasing the Risks of Further Cyber Attacks.  Over the last decade, the insurance sector has been pouring billions of dollars into technology advancements and improvements.  COVID-19 served as an event-driven catalyst that accelerated the use of virtual tools giving insurers greater access to clients' personal information. This new technology space race is going to challenge regulators’ ability to maintain the fine balance between consumer protection and acceptance of rapidly evolving AI and big-data driven advancements.  While state insurance regulators encourage innovation, they are developing new methods and protocols to evaluate the benefits of new technology against the appropriate application of this information and privacy.  It is likely that regulators will need to match the industry’s accelerating efforts, particularly in evaluating the use of algorithms and risk models associated with smart tools to ensure policyholders are being treated fairly and information is sufficiently protected. The sector's increasing usage of and reliance upon consumer data of all kinds, however, comes with a major risk factor - an increase in the threat of cyber attacks. In 2021, we've seen a number of cyber related incidents, particularly ransomware attacks, involving insurance companies. Cyber-security must remain a top-level concern for insurance company management. Additionally, insurance regulators need to continue efforts to increase accountability, transparency, and reporting related to cyber breaches. Failure to properly supervise cyber security represents an existential threat to insurance regulators everywhere.
• The Virtual Office Trend is Going to Impact Regulatory Practices. The current pandemic increased already existing trends related to flexible and remote work arrangements, purely virtual business platforms, and "touchless" services, among others. NAIC members adapted to these developments and, in many cases, allowed for "regulatory relief" or "regulatory accommodations" where existing laws or regulations would have limited such virtual approaches. Regulators are now evaluating whether these temporary accommodations should be continued or made permanent and, if so, what changes must be made to our current laws and regulations. Specific areas regulators will be reviewing include: electronic commerce, regulatory capabilities, and claims facilitation and practices specific to surplus lines. Additionally, as regulators across the globe also consider more virtual or remote systems and workforces, regulators will similarly need to adapt their own operational, strategic planning to take into consideration these trends. Just as commercial business enterprises are coming to understand that flexible work environments are now a recruiting and retention factor for employees, it is likely regulatory agencies will face similar dynamics.  
• A Bevy of Black Swans.  The year 2020 was a real-life stress test of epic proportions.  If 2020 demonstrated anything, it was that insurers could face not just one black swan event but possibly multiple such events at the same time.  As a result, advancements to and investments in stress testing and risk modeling demonstrated their value over the last year. For example, while the industry has used modeling to assist in managing its risks for years, this past year has seen insurers utilize modeling and scenario projections to a greater extent, including within ORSAs. Before the pandemic, many life insurers had included mortality and morbidity stress scenarios in their ORSAs with capital set aside for both to fit a pandemic of the magnitude of the 1918 Spanish Flu. During the past year, some insurers have improved their pandemic scenarios in the ORSA Summary Report and their capital modeling to correlate market and economic stresses more directly with the mortality and morbidity impacts of the pandemic previously projected. While these enhancements are encouraging, insurance regulators will need to remain vigilant in ensuring that insurance groups are pushing the outer boundaries of their stress tests.  
• Advancements in and Adoption of Telemedicine will Continue. During the pandemic, many U.S. states removed barriers around telemedicine, increasing the usage and popularity of telehealth. Insurance companies are beginning to see how this platform can do more than provide social distancing. Preliminary reports have shown telehealth services help reduce preventable emergency room visits and enhance doctors' ability to monitor chronic illnesses. Regulators are interested in taking a closer look at this trend and the implications this product is having on health and the claims experience.  
• Relationships Really, Really Matter. Perhaps the most profound emerging lesson learned coming out of this crisis is the value and importance of strong personal relationships, particularly amongst regulators. For those who lived through the 2008 crisis, one of the stark realities we faced was the lack of trust and communication between regulators. Ironically, in being thrust together in the decade that followed to work out lessons learned on solvency, governance, and group supervision, we formed strong bonds with one another. Through those relationships and the leadership of the IAIS, the global insurance sector was well served during the pandemic. Lines of communication remained wide-open, information and best practices were exchanged, plans of action were coordinated quickly and efficiently. However, we have spent down heavily on the interpersonal capital that was built up over the last 10 years. Additionally, we have seen a significant uptick in departures of several regulators across the globe who have been critical leaders on the front lines this past decade. As a global community, we cannot discount the incredible benefit resulting from intentional relationship building, and we must commit ourselves to rebuilding and renewing relationships with our counterparts in the "new normal."  

 Ouch! 

Actually, the injection did not hurt that much. As the nurse was administering my COVID-19 vaccine in mid-April of this year, my primary feeling was one of relief. What had been painful was the 15-months leading up to that moment. As a family, a nation, a world, we had endured so much, and finally, there was cause for hope. I know many of my colleagues in other countries are still struggling with their own recoveries. But we have demonstrated that there is a way forward, that there is cause for hope everywhere.  

There is still a lot of work for the NAIC and regulators across the globe as we continue to navigate the impacts of the pandemic and the new normal beyond. The effects of COVID-19 will have forever changed our society as well as the insurance industry. But we have shown that we are resilient and adaptive to change and are ready to face emerging issues head-on.  

The NAIC’s upcoming International Insurance Forum will provide us with an exceptional opportunity to discuss the past year and the road ahead. Randal K. Quarles, Vice Chair for Supervision, Federal Reserve Board, will be the keynote of this year's event. And NAIC officers, members, and international supervisors will participate in panels that take an in-depth look at the pandemic and other events impacting the global insurance community.  

As noted, enhance coordination and communication on the global insurance companies we regulate has proven to be one of the true success stories coming out of this crisis. Despite the events of the past year, I have been encouraged by our strong connections and the spirit of collaboration in practice. Cooperation among jurisdictions and international bodies, such as the IAIS, FSB, SIF, and OECD, has continued and even strengthened, with virtual meetings facilitating more interaction and greater inclusion.

And while that conference room in Basel sits empty for now, I look forward to the day in the not to distant future when I can gather with my colleagues from around the globe once more to discuss our collective lessons learned. The work will then begin anew to apply them, but only after we first allow ourselves the briefest of celebrations.

Information regarding this year's International Insurance Forum is available. I hope you have plans to join us.