Less than 1% of the estimated $4.5tn global pandemic-induced GDP loss for 2020 will be covered by business interruption insurance according to The Geneva Association.
Guy Carpenter head of public sector EMEA Ruth Lux writing in Brink News said, “Pandemic insurance has suffered from both supply and demand limitations. The payouts, while sporadic, can be so enormous that they dramatically exceed insurers’ capacity to bear them. And it’s always harder to convince a company to buy insurance that protects against something that hasn’t happened in 100 years and seems theoretical.”
She said, “Since the start of this pandemic, we have seen both insurers and reinsurers applying exclusions to pandemic-related risks. This raises the question of how the ‘protection gap’ … will be bridged in the face of another future pandemic.”
Ms Lux said, “COVID-19’s impacts are too wide-ranging for any one sector to carry the risks alone, and some sort of mechanism with government participation needs to be put in place.
“Depending on the solution that is employed, being either a 100% governmental solution or one where insurers share part of the financial risk, reinsurers can provide vital risk capital to support both tax payers and insurers’ exposure, as they do for a number of other critical risks including flood and terror.”
Ms Lux said much will depend on the appetite of local insurance industries to assume pandemic risk, which will likely be limited in the short-term, due to the high correlation characteristic of pandemic risk.
“The primary goal is to ensure all businesses have prearranged coverage, enabling them to provide business continuity and employment if another COVID-type event occurs. Parametric insurance should be considered as a preference as it has the key benefit of channelling claims monies into the hands of policyholders more quickly and efficiently than traditional indemnity products,” she said.
The best approach is to focus on pandemic risk at the beginning and then ensure that any programme that is set up would be able to cover other systemic risks down the line, once modelling capabilities and capacity have been developed.
The right pandemic insurance system can address the critical protection gap, making us more resilient to risk — and inspire more economic confidence in the future. A