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Library: Geneva Association – Public-Private Solutions to Pandemic Risk

Executive summary :

 The Digital Insurer reviews Geneva Association’s Report on Public-Private Solutions to Pandemic Risk

Business continuity risk must combine the state and industry

Commercial insurers have always sought to push the boundaries of insurability by developing innovative and viable approaches to new and emerging risks of major severity such as natural disasters or changes to liability regimes. For example, alternative risk transfer (ART) solutions, introduced in the 1980s, are designed to better reflect individual risk characteristics, mitigate moral hazard (ie the risk of people behaving less carefully once covered by insurance), offer (limited) cover for new exposures and expand capacity for large catastrophe risks (eg by tapping into the vast pool of institutional investment funds through insurance-linked securities (ILS)).

Weaknesses of business continuity

These efforts notwithstanding, pandemic business continuity risk was, in general, never possible nor intended to be covered by the private sector. To some extent, this reflects demand side reasons such as an endemic underestimation of the frequency and severity of pandemics. However, the shortage of supply primarily results from the high level of embedded risk and, therefore, prohibitively high amounts of capital needed to underpin credible insurance commitments. These extraordinarily high capital requirements are attributable to the unique correlation in the frequency and severity of pandemic business interruption losses as revealed by COVID-19. Looking ahead, this does not rule out the provision of small-scale selected private market coverage by limiting the degree of risk transfer and the number of businesses covered.

Governments must get involved

Coverage for pandemic business continuity risks with meaningful limits, however, will remain unavailable from the private insurance market as a result of prohibitively high capital requirements. Capital market investors, too, are likely to steer clear of pandemic business continuity risk, given its correlation with financial market impacts from pandemics. This is in sharp contrast to the uncorrelated nature of natural catastrophe risk, which is one of the main attractions of ILS for investors. The most significant obstacle to securitising (and insuring) pandemic risk, arguably, is the impossibility to model and price it.

Therefore, governments need to get involved as ‘insurers of last resort’ and evaluate insurers’ potential, non-risk bearing contributions to pandemic preparedness and resilience building (e.g. risk assessment, risk mitigation and claims management). Also, the public sector can bring to bear its unique ability to organise economically viable risk transfer over time through taxation and borrowing.

Four steps to risk mitigation

Against this backdrop, from an institutional perspective, focusing on how risk mitigation can be organised, one can distinguish between four ‘archetypical’ forms of public- sector involvement in pandemic risk schemes:

  1. Mandatory or voluntary direct insurance offered by the government and administered by private insurers
  2. Government reinsurance backstopping mandatory or voluntary private-sector coverages
  3. Mandatory social insurance
  4. Post-event financial relief with no pre-event dimension whatsoever

See the full report for more…

Link to Full Article:: click here

Link to Source:: click here

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