A global association of insurance and reinsurance company chief executive officers is calling on governments around the world to become “insurers of last resort” to address the current gap in coverage which exists for business interruption risk in the case of a pandemic.
In a series of reports, the Geneva Association – lead by a board of insurance company CEOs including the board’s chairman, Intact Financial CEO, Charles Brindamour – states that business interruption risk is uninsurable by insurers alone. Compared to projected global losses of more than USD$4-trillion in 2020 because of the pandemic, the global property and casualty (P&C) insurance industry collected only USD$1.6-trillion in annual premiums. Of those, only USD$30-billion was collected for business interruption policies.
Impossible to model and price such a risk
“COVID-19 has illustrated that pandemic-related business interruption is directly linked to the decisions of governments to implement lockdown measures, making it impossible for insurers to model and price such a risk,” they state. The risk, they add, is systemic in nature and would include widespread and simultaneous financial losses. “Coverage for pandemic business continuity risks with meaningful limits will therefore remain unavailable from the private insurance market, due to prohibitively high capital requirements. Government involvement is essential to enhancing preparedness for and resilience to future pandemic shocks.”
The report, Public-Private Solutions to Pandemic Risk: Opportunities, challenges and trade-offs, looks at four pandemic risk funding schemes where governments can play a leading role. The schemes proposed include mandatory or voluntary direct insurance offered by the government and administered by private insurers, government reinsurance backstopping mandatory or voluntary private-sector coverage, mandatory social insurance or post-event financial relief.
Pre-event risk mitigation and preparedness
“Each option has its distinct strengths and weaknesses. Having said this, just distributing cash post-event is probably the least effective approach, foregoing any benefits from pre-event risk mitigation and preparedness measures,” the report states. “For government-provided insurance, reinsurance and social insurance each, a solid economic case can be made with the final choice depending on the important trade-offs involved.” The report goes on to assess the benefits of each scheme against public policy goals. It also discusses why the market for pandemic business continuity risk coverage has remained insignificant and what it would take to enable a limited degree of risk transfer going forward.
“The shutdown measures adopted by many governments to contain COVID-19 have plunged the global economy into the deepest recession since the Second World War. This dislocation has exposed massive protection gaps in the areas of business continuity risk. Less than one per cent of the estimated USD$4.5-trillion global, pandemic-induced gross domestic product (GDP) loss for 2020 is likely to be covered,” says the report. “Governments need to take the lead in absorbing the lion’s share of pandemic-induced business continuity risk in order to harness the insurance industry’s proven capabilities in mitigating risk.”