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Can the Insurance Industry Bridge the Pandemic Insurance Protection Gap?

Pandemic insurance coverage has existed for a long time, but it has always been expensive and relatively rare. According to the Geneva Association, less than 1% of the estimated $4.5 trillion global pandemic-induced GDP loss for 2020 will be covered by business interruption insurance

Pandemic insurance has suffered from both supply and demand limitations. The pay-outs, while sporadic, can be so enormous that they dramatically exceed insurers’ capacity to bear them. And it’s always harder to convince a company to buy insurance that protects against something that hasn’t happened in a hundred years and seems theoretical.

Since the start of this pandemic, we have seen both insurers and reinsurers applying exclusions to pandemic-related risks. This raises the question of how the “protection gap” — the difference between insured and total losses — will be bridged in the face of another future pandemic. 

The Need for Government Involvement

COVID-19’s impacts are too wide-ranging for any one sector to carry the risks alone, and some sort of mechanism with government participation needs to be put in place. 

Depending on the solution that is employed, being either a 100% governmental solution or one where insurers share part of the financial risk, reinsurers can provide vital risk capital to support both tax payers and insurers’ exposure, as they do for a number of other critical risks including flood and terror. 

Much will depend on the appetite of local insurance industries to assume pandemic risk, which will likely be limited in the short-term, due to the high correlation characteristic of pandemic risk. 

There are a range of different design considerations for a pandemic public-private partnership solution, and there is no one-size-fits-all option available for each country, but each of them will consider some version of the following characteristics:

  1. The primary goal is to ensure all businesses have prearranged coverage, enabling them to provide business continuity and employment if another COVID-type event occurs. To this end, the solution does not necessarily need to be mandatory, especially if risk mitigation practices are linked to premiums and the overall premium is affordable. 
  2. Secondly, parametric insurance should be considered as a preference as it has the key benefit of channeling claims monies into the hands of policyholders more quickly and efficiently than traditional indemnity products. 
  3. Thirdly, many people in the insurance industry believe pandemic risk is best managed through a standalone policy, rather than being expanded into original policies. The policy can provide a predetermined fixed limit, which might cover essential operating expenses, such as wages, rents for a period of one to three months following a governmental order to shut down business or a stay at home order. This type of approach can enable the efficient dissemination of funds to ensure business continuity in the event of another COVID-19-type pandemic. 

Many Discussions

Globally, there are over forty country-level discussions about the establishment of a pandemic public-private partnership solution in progress. 

A key consideration is the trade-off between fairness of coverage versus the need for the swift disbursement of funds. In the context of Europe, discussions are taking place among a range of European stakeholders, including the Federation of European Risk Management Associations (FERMA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Commission on a potential EU solution to uninsurable and systemic risks. 

One lesson of the coronavirus is that we all underestimated our susceptibility to a pandemic and the domino effect it would have on our global economy.

While most stakeholders agree there is a need for solutions for uninsurable and systemic risks, there is a general sentiment that doing so from the outset could stall progress due to the magnitude of the risks and correlation and aggregation concerns. Instead, the focus will likely be on non-damage business interruption cover stemming from future pandemics.

A good example of this approach is the French CATEX solution, which while currently stalled, may be reinstated later this year. Originally, a broader systemic risks scheme was considered, which would integrate the existing natural catastrophe and terror pools into the scheme, but it was decided that it was too complex.  

The best approach is probably to focus on pandemic risk at the beginning and then ensure that any program that is set up would be able to cover other systemic risks down the line, once modeling capabilities and capacity have been developed.

Insurer of Last Resort?

Another aspect of the discussions from Europe is the possibility of the EU taking on the role of insurer of last resort on top of any national schemes that are eventually put in place. 

Policymakers and stakeholders are generally cautious about what role this should be. As mentioned, some member states are already setting up schemes for pandemic, while others have existing pools for other catastrophic risks, such as flood or terrorism, and others have no pools nor the experience and knowledge required to set them up. 

The role of the EU as an insurer of last resort in these conditions and considering the politically sensitive nature of post or pre-funding at the EU level will probably come once discussions mature. Conversely, there is a clear need for coordination across the EU considering the cross-border nature of the risk and the interconnectedness of the European Single Market. 

EU involvement in the discussion also guarantees that all member states will be involved in the discussions, and those without public-private partnership experience can benefit from the best practice experience of others.

Multiple Approaches

It is also worth highlighting the different discussions taking place in the U.S., which are not wedded to one solution. There are five approaches being considered for a U.S. pandemic public-private partnership solution. 

The Pandemic Risk Insurance Act of 2020 was a bill on the table of the 116th Congress. The bill is based on the U.S. terrorism insurance backstop and establishes a system of shared public and private compensation for business interruption losses from pandemics. It asks a lot of the insurance industry, as it proposes expanding original policies to provide full pandemic coverage. Intended to be a starting point for the discussion on a pandemic insurance solution, Congresswoman Carolyn Maloney is actively seeking feedback from the industry and policyholder community to galvanize support for her bill. This Congress, she intends to reintroduce the legislation and consider feedback from the industry in an effort to advance the solution. 

Meanwhile, the American Property Casualty Insurance Association, which is advocating for the Business Continuity Protection Program, is a 100% governmental solution, however, risk mitigation is not actively promoted by it. 

Then there is a proposal from Zurich, based on the Federal Crop Insurance Program, and another from Chubb, the Pandemic Business Interruption Program; this is a two-part public-private partnership with a parametric trigger for small businesses and an indemnity trigger for large businesses. 

In summary, with the right public-private solution, policyholders can take significant steps to bend the risk curve in collaboration with carriers, brokers and risk advisers. One lesson of the coronavirus is that we all underestimated our susceptibility to a pandemic and the domino effect it would have on our global economy. 

The right pandemic insurance system can address the critical protection gap, making us more resilient to risk — and inspire more economic confidence in the future.

Ruth Lux

Head of Public Sector EMEA at Guy Carpenter

Ruth Lux is the Head of Public Sector EMEA at Guy Carpenter. She is based in the London offices.

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