Lloyd’s proposes “open source” frameworks for future pandemic coverage

Lloyd’s of London is proposing three “open-source frameworks” to provide a blueprint for better protecting society against systemic catastrophic events such as pandemics, after noting the market will pay out between $3 billion and $4.3 billion to its global customers as a result of the far-reaching impacts of COVID-19.

In its recent paper, Supporting global recovery and resilience for customers and economies, Lloyd’s outlines new solutions for the reopening of businesses against the threat of further waves of COVID-19; a new facility to help longer-term business recovery; and a new reinsurance vehicle based on a public-private partnership.

“The purpose of insurance is to help businesses and communities manage the risks they face, enable them to recover quickly from disasters by paying claims, and provide the security that allows them to innovate, develop and drive economic growth,” Lloyd’s chairman Bruce Carnegie-Brown said in a statement announcing the Lloyd’s proposals.

“COVID-19 has demonstrated that there is much more we can do to support our customers by providing protection for the changing risks they face. Some of these risks are of a scale that require partnership with governments globally and this report identifies ways in which the insurance industry could work with governments to share risk and create a braver, more resilient world.”

If implemented, Lloyd’s says, its proposals could provide customer protection for further waves of COVID-19 (ReStart and Recover Re) and other future pandemics, as well as strengthening societal resilience against future systemic catastrophic events (Black Swan Re).

ReStart is a potential non-damage business interruption solution (loss of revenue without a physical damage trigger) for future waves of COVID-19.

Designed by Lloyds to help small and medium-sized enterprises in particular, the solution focuses on giving certainty of non-damage business interruption coverage initially to UK SMEs by pooling limited capacity across a number of Lloyd’s market participants. The product would support SMEs reopening, by offering a range of limits that ensure coverage is affordable for customers without requiring any government support.

The second framework, Recover Re, sets out a proposed ‘after-the-event’ insurance product. The intent here is to provide immediate relief and cover for non-damage business interruption over the long-term, including the current COVID-19 pandemic.

“If implemented, this could be an efficient way to inject commercial and government funds into the economy, providing relief to customers with limited borrowing capacity,” Lloyds says in a statement. “This framework could be implemented in any country where the government has the resources and industry commitment to support it.”

The third proposal is the development of Black Swan Re. This reinsurance framework would depend on a government and industry partnership that could better protect customers from the long-term effects of systemic catastrophic events — from another pandemic, or global supply chain disruption, to the interruption of critical infrastructure or utilities.

“The framework would provide reinsurance for commercial non-damage business interruption cover for black swan events through industry-pooled capital, backed by a government guarantee to pay out if ever the pool had insufficient funds,” Lloyd’s states.

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