The unprecedented healthcare and economic challenges brought about by the coronavirus pandemic has exposed how ill-prepared the insurance industry is to deal with tail-risk events of such magnitude. These challenges have also brought to the fore how the industry needs government support to survive other catastrophic events.
In an opinion piece published in The Globe and Mail, Alister Campbell, president and chief executive officer of the Property and Casualty Insurance Compensation Corp. (PACICC), discussed how searching for solutions to address the pandemic also opens the opportunity for the government and insurance leaders to tackle other “long-standing yet unaddressed” tail-risk events, including earthquakes, wildfires, and floods, which are “inevitabilities” in a geographically diverse nation like Canada.
“It is a sobering and troubling reality that Canada remains the largest developed economy in the world with a large exposure to earthquakes and without a government mechanism to backstop the insurance sector and properly protect our country’s citizens when that inevitable event occurs,” he wrote.
However, Campbell added that these events present very different insurance challenges, and therefore, also require varied solutions.
Pandemics, for example, are excluded from insurance policies offered by insurers because it is impossible to diversify the risk, “either by time or by geography.”
“A global pandemic strikes everyone, everywhere and at the same time,” he wrote. “So, if ‘pandemic pools’ are to be constructed, the insurance industry can offer distribution and claims management capabilities but cannot put up material amounts of risk capital. In the end, the loss must largely be borne by government.”
Campbell added that modest tail-risk premiums can be collected and invested, but for a substantial pool to be collected, there should be a sufficiently “long span of time” without major events. However, he warned that these pools will never make up for the economic losses resulting from a shutdown of entire economies for months.
Campbell wrote that the situation is different with earthquakes and other catastrophic events.
“Unlike a pandemic, earthquake risk is diversifiable globally (the earth is very unlikely to shake at multiple spots simultaneously or burn everywhere at once). So, insurers can price, select and underwrite for earthquake as they do for flood or fire, and pay the claims when they happen,” he wrote.
“Insurers are ready to respond to massive events without any need for recourse to government at all since many individuals and businesses already buy insurance to cover this risk.”
Campbell also differentiated the level of government support the insurance industry needs to effectively address these tail-risk events.
“In a pandemic, the insurance sector could offer only minimal levels of coverage (at best) before having to have the risk transferred to government. By contrast, in the case of an earthquake, all Canada needs is a government backstop for a truly extreme tail risk – funds that could be repaid by the insurance industry after Canadians have their claims paid,” he wrote.
Campbell admitted that it would be difficult to find solutions to these events all at the same time as each presents a different set of challenges.
“Given the myriad problems represented by these diverse forms of tail-risk events, we are unlikely to find a single mechanism designed to solve all of these risk-transfer issues at once,” he wrote.
“But, if nothing else, the COVID-19 pandemic has forced a larger conversation around these kinds of events. It is a conversation we need to have now. Developing workable solutions to the tail risks to which Canada is most exposed is in the urgent national interest.”
