Could a pandemic be an insurable risk? Only through public-private collaboration
But there are times when the insurance industry alone is not able to directly take on this task. For example, it is impossible for insurers to model and price the risk of business disruption due to a pandemic, as this risk directly depends on governments’ decisions to implement lockdown measures in order to contain the virus.
Moreover, it is a systemic risk, which means that maximum losses are not manageable from the point of view of the solvency of insurance companies.
It is therefore necessary to explore public-private collaboration mechanisms that will make societies more prepared for and resilient against risks as exceptional as that experienced in the past year.
As Bosco Francoy, CEO of MAPFRE Global Risks explains, “The insurance industry’s experience in providing solutions to major catastrophes has long been proved. As part of these solutions, knowledge of risk and its modeling is essential in order to calculate premiums and mutualize the effects of damage. But in the face of unexpected and unforeseen situations, effective public-private solutions have been put in place for the benefit of society. The outbreak of a pandemic like the one we are living through is the perfect opportunity to revisit this type of collaboration.”
In a recently published study titled How Much ‘Skin in the Game’? Public-private solutions to pandemic risk, authored by Kai-Uwe Schanz, the Geneva Association addresses precisely this issue and identifies up to four potential public-private pandemic risk management solutions. All of them give governments a leading role, as insurers of last resort, as is ultimately the case in the banking sector. The solutions are as follows:
- Mandatory or voluntary direct insurance offered by the government and administered by private insurers: the public sector would provide voluntary or mandatory insurance to those businesses who are exposed to pandemic risk.
- Government reinsurance backstopping mandatory or voluntary private-sector coverages: governments would provide reinsurance to private-sector insurers that would kick in for losses above a certain threshold and up to a designated limit.
- Mandatory social insurance: modest public-sector coverage with mandatory participation through pre-event payments (e.g. taxes or levies).
- Post-event protection: an ad hoc safety net provided by governments to those impacted.
Of these four, the last is the only one currently being implemented; that is, compensation in the form of public aid, bailouts and credit under favorable conditions being received by certain sectors affected by the pandemic. But this option leaves out many of those affected.
As explained in the report, less than 1 percent of the 4.5 trillion dollar global pandemic-induced GDP loss is likely to be covered by private insurance, reflecting coverage exclusions consistent with that explained at the beginning of the article, as well as the niche character of business interruption insurance, which accounts for less than 2 percent of the world’s Non-Life insurance market.
In short, insurers can play a very important role in this process and provide their expertise in a wide range of areas, ranging from pricing and limited coverage to distribution and administrative support. Public sector involvement is fundamental in order to be able to provide a solution that protects the insured from risk without threatening the survival of insurers, through alternatives such as those proposed by the Geneva Association in this study.