Potential solutions to pandemic risk

Insurers cannot manage pandemic risk alone but there are potential solutions including a government backstop, a panel of experts from The Geneva Association, Chubb, Peak Re and the Singapore’s Global-Asia Insurance Partnership (GAIP) agreed.

Governments must take the lead in the way pandemic risk might be handled and even insured in the future, given the scope, scale and nature of risks—but the insurance industry also has a role to play.

That was the view of participants on a SIRC panel titled “Insurability of Pandemic BI Risk” which took place yesterday (Tuesday, November 16).

The insurance industry would never have coped with the risk of COVID-19 as the pandemic defied national borders and foreseeable timelines, and coordinated government action killed off the element of randomness, Kai-Uwe Schanz, the deputy managing director of The Geneva Association, said in his opening remarks.

“Once you introduce correlation in severity and frequency across the risk pool, capital requirements go through the roof,” Schanz said. Every metric from premiums through claims “reach levels which are prohibitively high.”

Just the monthly economic cost of the lockdowns, estimated at $1.7 trillion by the OECD, could wipe out the full capital of the P&C industry, Schanz claimed. One week of German lockdown equals the entire global take on business interruption premiums. “You don’t have to be an actuary to ask yourself if this is insurable.”

Paul McNamee, senior VP and Asia-Pacific regional head at Chubb, agreed. “In terms of skin in the game, there is no way that the industry’s skin is thick enough to support the game,” he said. “It has to be a government-led and funded programme, but the insurance industry does have assets to bring to bear.”

The right approach

The right public-private partnership could be tough to conceive, however. Panellists were highly critical of global post-pandemic fiscal stimulus, calling it a costly exercise in misallocating funds laced with moral hazard.

Insurers, quite naturally, see more value in a pre-funded model than post-event payments. “It is always better to fund risk beforehand than try to fund it after the loss and have a clear mechanism for how it is going to be paid,” McNamee said. Post-event, the view to proper allocation gets blurred.

Also unsurprising from industry leaders: the preferred model would be government-mandated and insurer-run mandatory coverage schemes. But few hopes are being held out that voters will warm to a programme that will undoubtedly be seen as a new tax scheme. A government backstop on reinsurance could prove more palatable.

That left the bulk of comments to focus on the insurance industry’s role as a provider of expertise.

“Moving the ship of state is very difficult and responding in an agile way is challenging,” former regulator Conor Donaldson, now with the GAIP, told the panel. Policymakers are naturally looking to leverage insurance industry expertise in pricing, mitigation, prevention and more. Nobody does behavioural “nudging” quite like insurers, he suggested.

COVID-19 caught the industry unawares, despite some signs of greater sophistication in Asian markets that had been through SARS or previous local epidemics. Donaldson, formerly of the IAIS union of regulators, admitted that a 2018 review of policy direction hadn’t found focus for pandemic risks.

Future risks

Major global trends point to increased risks of future pandemics, the chief executive officer of Peak Re, Franz Hahn, said, citing massive increases in the number of world travellers, urbanisation on a global scale, pandemic risks borne by climate change and more.

Insurance-linked securities (ILS) cannot cover more than the fringes of the overall pandemic risk picture, participants agreed.

Markets won’t like risks that know no limits on scale or scope or that may hinge on the vagaries of government action. Engaging ILS beyond those elements that can be easily ring-fenced will require a sophistication in modeling that isn’t available today.

“If limited in scale and scope, yes, I think the industry has some chance to get in there,” Tony Gallagher, the Asian head for Guy Carpenter & Company, said. “Broad scale, broad scope, I don’t think the capital is there from the ILS market.”

Lessons learned from the pandemic need to be taken to the cyber risks field, participants said in chorus. The industry approach to cyber may show signs of recognising a systemic nature to risks on the books.

“When a risk becomes so systemic, whether that be pandemic or cyber-related, it begins to exceed the risk you are comfortable with on your balance sheet, and then it begins to exceed the amount of capital in the industry. Then you start to see a change of coverage,” McNamee said.

“You run out of insurers that are prepared to cover risks they don’t understand,” he said. “That is what you are seeing today in the cyber market.”