The COVID-19 pandemic has highlighted how vulnerable individuals and businesses are to a major downturn - however, ‘pandemic insurance’ is not something that currently exists, and would be incredibly difficult for any insurer to reliably offer.
In light of this, some industry players are suggesting a public-private approach could be the best way to offer cover for a low-frequency, high-impact event like a global pandemic, as it would allow insurers to share the risk with the government. Speaking on a panel led by ICNZ chief executive Tim Grafton, APRA executive board member Geoff Summerhayes said a public-private approach could be an attractive option for insurers, as it could allow them to pick up the ‘second layer’ of loss rather than the full tab.
“This is a very difficult area,” Summerhayes commented.
“The principles of insurance are based on diversification across business lines, geographies and firms. The major issue we have with a pandemic is that it’s a highly correlated risk, it’s indiscriminate, and there is no diversification.”
“To underwrite that risk and price it appropriately for businesses in the community is very difficult, which is why we come back to the need for a public-private partnership,” he explained.
“That way, there is a layer of loss that can potentially be taken by sovereigns. At the moment, the sovereigns are picking up the pandemic tab globally - the question is how they can perhaps moderate that impact by taking a first loss, and then sharing some additional layers with commercial providers.”
However, the public-private approach is not without its difficulties - despite looking like a promising solution, ABI director general Huw Evans warns that it is often incredibly hard to set up and maintain, as governments worldwide are usually extremely reluctant to take on such a high level of risk. He says insurers would ultimately always have the lower hand at the negotiating table, with the state likely to dictate the terms of any potential partnership.
“The state is usually quite reluctant to enter into these sorts of relationships, even if others have decided that it’s the right model and solution,” Evans said.
“Secondly, such partnerships are never equal. The state is always on top, it always gets to dictate the terms. I think that for any public-private partnership that covers the full extent of liabilities for something like a pandemic, the potential level of state liability would be so great that any government is going to want very significant control over that partnership, and the insurance industry needs to go into that with its eyes wide open.”
Evans also warns that just because a product can be provided, that supply won’t automatically generate demand. He says people may be reluctant to purchase cover for such a ‘once in a lifetime’ event, and it’ll be on the insurance sector to convince buyers that it’s a worthwhile investment.
“We shouldn’t confuse supply and demand here - there is very little demand from businesses or individuals to be protected against these low-frequency, high-impact events,” Evans said.
“That’s partly a problem we have to own as an industry, and we have to do more to make clear to people why these things should be brought. But the comparisons between pandemics and something like cyber are very profound, and there’s very low SME take-up there.”
“Cyber is a rising threat with the potential to deliver a knockout blow to businesses, rising lines of liability, etc., and yet the take-up of cyber insurance three-four months into this pandemic is no higher than it was before,” he explained. “And yet the risks it poses are just as great.”
“On public-private partnerships, I say let’s have the discussion, let’s explore the different models and see what bits of different models might be useful,” Evans concluded.
“But let’s not think that it’s an easy solution to try and create, or that it will necessarily result in the mass-selling of those products to the people who need the insurance. Those are both very significant challenges that lie ahead for us.”