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What an insurance solution for pandemic risk might look like

August 17, 2020   by Jason Contant

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The P&C insurance industry has technical expertise it could bring to bear in covering future pandemics (risk management and claims adjustment experience, for example), but the financial losses would best be covered through public-private partnerships, speakers said recently during an A.M. Best reinsurance webinar.

“If there is a role where the governments take the vast majority of the risk, but there’s a piece played by the reinsurance sector [and] the insurance sector, I think that [future pandemic coverage] can potentially work,” said Jonathan Isherwood, CEO of reinsurance for the Americas with Swiss Re. “There is a role for insurers to play: Risk management and claims assessment are the expertise we bring. There’s really got to be good-faith attempts to find that balance of public and private partnerships.”

Isherwood indicated he is supportive of ideas that insurers like Chubb are putting forward in the United States. Chubb has proposed its own pandemic business interruption program, with a two-tiered approach to accommodate small and large businesses.

For its part, Lloyd’s has proposed three “open-source frameworks” to provide a blueprint for better protecting society against systemic catastrophic events such as pandemics:

  • ReStart Re is a potential non-damage business interruption solution (loss of revenue without a physical damage trigger) for future waves of COVID-19
  • Recover Re proposes an ‘after-the-event’ insurance product, with the intent to provide immediate relief and cover for non-damage BI over the long-term, including the current COVID-19 pandemic
  • Black Swan Re would depend on a government-industry partnership that would protect customers from the long-term effects of systemic cat events – from another pandemic or global supply chain disruption to the interruption of critical infrastructure or utilities.

“I think private-public partnerships are necessary to cover systemic risks such as COVID-19,” Silke Sehm, member of the executive board, property & casualty, with Hannover Re, said during the State of the Global Reinsurance Market webinar Tuesday. She pointed to existing partnerships like Pool Re in the United Kingdom, but noted that the “insurance industry can only play a limited role due to capacity restraints and the systemic nature of the risk.”

The nature of pandemic risk is one reason why it is often excluded in insurance coverage. “If it snuck into some covers, frankly, I’m pretty sure it wasn’t costed for in any way,” Isherwood said. “So the intention is not to cover it for the very reasons we now see: It’s a global pandemic and you can’t diversify it away.”

Related: Why A.M. Best sees the global reinsurance market as ‘stable’

Another panellist, Carlos Wong-Fupuy, senior director of global reinsurance ratings with ratings firm A.M. Best, added it’s difficult for a risk of this nature to be run exclusively by the private sector, especially given the lack of ability to diversify the risk, the fact that it affects all lines and regions, and that it’s an ongoing situation. “Public-private partnerships may work,” he said. “The technical role of the reinsurance industry is essential, and there’s lots to offer there.”

A.M. Best TV moderator Meg Green asked if an insurance solution for pandemic risk could be written profitably.

“I’m not sure if it can be underwritten profitably,” said Scott Mangan, A.M. Best’s associate director of global reinsurance. “I’m not sure that’s the best way to go about doing it. I’m not sure that there’s a risk appetite for the industry to underwrite this in terms of covering the entire pandemic risk,” he said, noting that “it doesn’t seem like something you can diversify out of.”

Mangan noted the industry has been modelling pandemic for some time; it’s an area of expertise where insurance professionals could help the public sector quantity the risk and come up with a solution. “I think a place where the industry could play the most effective role would be in terms of risk management.”

The best takeaway from COVID-19 for the industry is learning how governments are reacting and how shelter-in-place orders translate into economic impact, Mangan said. “I’m not sure any of that could have been predicted without going through that experience.”


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