Time to Shine: How Insurance CROs Stepped Up to COVID Challenges

By Russ Banham

Carrier Management

At a time of great crisis, chief risk officers have stepped forward to bring their unique skillsets to bear in assessing the strategic and financial impact of both the pandemic and the recession and reporting these real-time insights to the board.

Take Steve Rominske, CRO at Church Mutual, a provider of property and liability insurance to religious institutions, schools, assisted living centers and nonprofit organizations. On March 11, when the World Health Organization declared a pandemic, Rominske, who had been monitoring the spread of the coronavirus, formed a team of functional leaders in legal, IT security, HR, media relations, risk and loss control, and his own enterprise risk management (ERM) organization.

In heading up what he calls Command Central, the team had three anchoring points: employee safety, communications and customer service. At the same time, Rominske joined other executive management leaders in modeling the impact of COVID-19 on the insurer’s investments and coverages.

“We looked at all potential implications to our cash flow and liquidity, making various assumptions as to how long the pandemic and recession might last—six months, nine months and longer,” he said. “We also modeled worst-case scenarios on our lines of business, looking at unusual incurred expenses like the need to refund auto insurance premiums in some states because of reduced driving miles.”

In developing this business impact analysis, two issues stood out: the movement in several states to reinterpret property insurance policy language to provide coverage for lost business income and a similar state push to deem different classes of businesses as essential, requiring insurers to provide workers compensation in the event they were infected by the coronavirus.

“In both cases, the prospective changes in coverage intent were concerning, impelling us to get our arms around the potential business impact,” said Rominske. “Meanwhile, as the markets reeled and the country fell into a recession, I was trying to discern the impact on our investment income, while the Command Center team was putting together the communications on all of it,” he said. “If there ever was a moment for CROs to shine, this was it.”

Reckoning With Reality

Three other CROs in this article have similar tales to tell, each one entrusted to identify, analyze and mitigate a rare combination tail-risk event that extended beyond many underwriters’ probability distribution assumptions. Across the board, the CROs assumed a leading role in making sense of the uncertain situation, plotting a path forward across constantly shifting terrain, and reporting these experiences directly to the CEO and the board.

“CROs are trained to be forward-thinking, strategic and disciplined in setting an agenda,” said Michael Angelina, executive director of Insurance and Risk Management at St. Joseph University’s Haub School of Business. “They’re critical when it comes to understanding business continuity and emerging risks and the tail distribution of potentially high-severity events.”

Satyan Sawhney fits this profile. The Group CRO at Sompo International Holdings said the firm had closely watched the gradual spread of the coronavirus in China in early January.

“I was deputy CRO at the time, and the virus had yet to reach pandemic stage, but by early March it was very clear from the simulation models that it had become a full-blown epidemic in China and was on a clear course to transform into a pandemic,” he said.

In March, when Sawhney became group CRO at the specialty provider of property and casualty insurance and reinsurance, he transitioned from monitoring the spread of the coronavirus to considering its impact on Sompo International globally.

“I reached out to the product leads and inquired where and how it might represent a threat,” he explained. “This process grew from that point on into the formation of a cross-functional team composed of functional heads and underwriting leads.”

His chief task was to harvest collective knowledge from the team members to assess the business and financial impact of the pandemic, create an outlook of different scenarios based on the insights and then report these possible outcomes in a series of briefings to Sompo’s senior leadership.

“My role was not to command and control with broad strokes but to work collaboratively with the underwriters to understand where our products potentially were at risk and how best to respond to these issues on a coordinated basis with fine strokes,” he said.

In certain market segments, the team assessed how remote the company was from the tail risk associated with the pandemic and to what extent the tail had been assumed by other reinsurers. “This isn’t just a case of walking away; depending on the analysis, we might decide to take on more risk,” he said.

The embattled healthcare sector is an example. Some insurers were restricting workers comp insurance coverages for essential workers like physicians, nurses and clinicians.

“Do you walk away, or do you measure the risks in a balanced way to trade with confidence?” he asked. “Our takeaway was that the sector brimmed with human endeavor, spirit and energy, impelling us not to implement the blanket exclusions other insurers were putting forth when the sector needed coverage.”

“This is not about taking foolish risks; it’s about situational awareness—exercising curiosity to understand what is really going on; reaching out to others inside the organization in claims, underwriting and investments to leverage their collective knowledge and experience; and then building a framework to collaborate with them in modeling the impact,” he said.

Hammering Together a Framework

CROs are especially adept at collaborating and constructing a framework. The job requires a background in accounting, legal, actuarial or economics to be able to assess wide-ranging strategic, financial, compliance, competitive, legal and hazard risks.

“CROs have gotten very good at understanding the business by spending time with functional and business line leaders to know the right resources and people to draw upon when a crisis rears,” Angelina said. “They may not know the subtle nuances of policy forms and wording, but they know what questions to ask and who has the answers.”

CRO Amanda Aponte at SFM Mutual Insurance is a case in point. Aponte was on vacation in Florida with her family enjoying the rides at Disney World when the theme park suddenly closed. She immediately triggered the business continuity plan at SFM Mutual, a specialist provider of workers comp insurance, and directed her ERM team to interview each risk owner across the enterprise—the heads of underwriting, claims, finance, loss prevention and so on—about potential COVID-19 impacts.

“As a workers comp insurer, we needed to decipher the economic, medical and regulatory issues that could adversely affect claims frequency,” said Aponte, who also took on the title of chief financial officer in early September.

Some states had interpreted their laws to suggest the coronavirus, much like the seasonal flu, was not an occupational disease and, therefore, would not be covered by workers comp. However, other states like Minnesota (SFM Mutual’s home state) had issued a presumption that essential healthcare workers and first responders were covered by workers comp. “We needed to assess and model each of these varied jurisdictional positions in terms of their individual and collective impact on our results,” Aponte said.

The modeling exercise was challenged by the inability to get a firm grasp of the rate of COVID-19 infection, which surged, stalled and surged again on a region-by-region basis, due to the relaxation of guidelines requiring social distancing and wearing a mask. “It was difficult to decipher a target that kept moving,” Aponte said.

As customers’ employees came down with COVID-19, it was equally difficult to determine the lagging effect on premium volume, as workers comp insurers charge premium based on an insured’s payroll. “Some employees were furloughed and others laid off, but this information would not be available until we closed out the policies at audit,” Aponte explained.

Another top-line consideration was investment income. On March 15, the Dow experienced a near-3,000-point plunge and continued to fall further in the weeks ahead. In early June, the National Bureau of Economic Research confirmed the obvious—the country was in a recession.

“It was my job to keep the board updated, presenting members interim re-forecasts suggesting what we thought the remainder of the year would look like, investment-wise,” said Aponte. “It all rolled up into my role as the CRO.”

The recession was very much on the mind of Greg Richardson, chief risk and strategy officer at TransRe. When the stock market hit bottom on March 23, Richardson was in the midst of submitting the global reinsurer’s ORSA Summary Report to the NAIC, assessing the adequacy of its risk management and solvency positions.

“It was my job to model the impact [of the pandemic] on us financially,” he said. “At the time, our assets were falling. Several states also were starting to close down business. The good news is we’d been stress testing the possibility of a pandemic for 10 years.”

He had studied recent pandemic events from SARS all the way back to the Great Plague of London in 1665, resulting in the death of 25 percent of the city’s population. Richardson was confident he was in a good position to map the business impact of COVID-19.

“I worked closely with the underwriters in modeling past and more recent events,” he said. “We set up this macro framework to see how big and bad things could be. This gave us insight into the potential loss of life, medical expenses, contingency business interruption exposures and event cancellation risks. We then worked through each line of business at a micro level to make sense of the top-line financial impact.”

He also needed to assess the asset side of TransRe’s balance sheet. To grasp the pandemic’s long-term impact on GDP, he examined modeling data Goldman Sachs and other asset management firms had put forward. He also needed to evaluate the impact of social unrest following the killing of George Floyd.

“We needed to assess a combination of scenarios that posed top-line risks, including a growing number of businesses shutting down or going bankrupt, an economic crisis tempered somewhat by the government’s stimulus legislation and the possibility of civil commotion,” he said. “Fortunately, one of our property underwriters astutely alerted me that following a great economic shock, it’s not uncommon to confront social disruption.”

Almost Closing the Loop

At present, the pandemic continues to be a front-burner issue for the CROs. Now battle-scarred, they are generally more confident about their abilities to manage the incessant uncertainty than they were at the outset.

“Once we got our arms around what this was and saw the asset side rebounding, survival and panic were taken off the table,” said Richardson. “I knew we could manage this.”

So did Aponte. “The outcomes of the claims and premium models were encouraging,” she said. “The impact on workers comp for us was somewhat muted and not overly severe, and the premium volume impact is not nearly as bad as we feared at the outset, although it is still too soon to make a definitive judgment.”

Sawhney said the pandemic reinforced the criticality of cross-functional collaboration and a formal structure to deal with potential high-severity incidents.

“I continue to worry about critically systemic infrastructure events like a solar flare or cyber event that takes down a power grid, but I realize it has less to do with the risk analytics about our coverages and everything to do with who we are as a company in terms of being prepared to take risk strategically,” he said. “Our ability to be agile in dynamic ways is what is important going forward.”

Rominske at Church Mutual echoed the value of agility in a world of fast-changing risks and opportunities. “If this was a tornado event that wiped out a building at night, people here would understand the end point and know exactly what to do,” he said. “But this pandemic constantly shifted and simply demanded our attention.”

On any given day, he tried to get through the items on his normal agenda, only to be interrupted multiple times by the need to assess and address the pandemic and the recession it ignited.

“That never happened before with any other major event—not with the Great Recession or 9/11,” he said. “But we learned a lot and continue to learn from this awful time. I’d like to think we’re better off as a result.”

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.