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The challenge of making pandemics insurable

The challenge of making pandemics insurable | Insurance Business UK

The challenge of making pandemics insurable

Facing losses of more than US$100 billion (approx. £70.85 billion) globally thanks to the COVID-19 pandemic, many insurers have moved to strike pandemic coverage from all new business policies, according to a Reuters report.

Denis Kessler, chairman and CEO of French insurer SCOR, told a conference recently that pandemic risk was like war.

“We exclude war,” Kessler said. “It’s not insurable.”

But the huge demand for pandemic cover is forcing insurers to puzzle out how they can add pandemic risk back to policies without making them prohibitively expensive, Reuters reported.

One segment scrambling for pandemic cover is the film and television industry. US company SpottedRisk has introduced a model built on years of data about the political and economic environment of film locations in 150 countries – as well as a year’s worth of COVID-19 shutdown data – to devise a pricing mechanism for covering production stoppage due to a pandemic.

“I had been told by 20-plus industry insiders that it was going to be impossible, but we found a way,” SpottedRisk CEO Janet Comenos told Reuters. SpottedRisk said the policy has allowed 19 independent film and television productions with budgets between US$1 million and US$85 million to film in locations across the world.

The report noted, however, that while a film project’s risks are contained over a finite amount of time, industries like airlines have much higher potential losses which could prove more difficult to insure. This has led to many insurers saying that extensive cover will only be possible if governments provide backstops.

The report highlighted that insurers failed to predict the extent to which global economies would be locked down to suppress the spread of the virus.

“Our modelling does capture infections and mortality,” Robert Muir-Wood, chief research officer at risk-modelling firm RMS, told Reuters. “It didn’t capture all the subtlety of how governments respond, driven by the number of vacant ICU beds.”

It was highlighted that RMS is now accounting for those factors.

Meanwhile, government responses meant that claims on trade credit, event cancellation and business interruption insurance were even higher than claims for life insurance, because many of those who died of the virus didn’t hold life insurance due to their age.

“A year ago, on the non-life side we had essentially no pandemic modelling skills,” said Iwan Stadler, head of accumulation management at Zurich.

Few insurers have returned to offering pandemic cover for non-life policies, except in cases where events have been scheduled far in advance and insurance was bought years ago, such as the Olympics. Cancellation of the Olympics would result in a loss of US$2 billion to US$3 billion, insurance sources told the publication.

Instead, insurers are looking to governments for assistance. Britain, the European Union and the US are all considering plans in which commercial insurers would be backed by government reinsurance programs. The report noted that such programs would be less expensive than business bailouts, but the process of developing them moves slowly. However, some say commercial insurers can do more on their own to provide pandemic cover.

“The private market has the ability to create solutions,” Rod Fox, CEO of broker TigerRisk Partners.

One possible strategy would be to repackage pandemic risk as debt through insurance-linked securities (ILS), thus sharing the risk with investors.

“It became clear to us early in the pandemic that the models which were appropriate prior to COVID were no longer appropriate,” said Scott Mitchell, portfolio manager for life ILS at fund manager Schroders. “COVID-specific aspects simply weren’t captured. … The characteristics of the disease and the response by governments, and political factors that were involved in that.”

The report highlighted that Schroders has developed new types of life ILS which take into account factors beyond mortality rates. It also noted that insurers are also working on parametric policies, which automatically pay out a specified amount when a certain trigger, such as a government shutdown, occurs.

“If you can put a boundary around it, you can price the risk,” Greg Medcraft of the Organisation for Economic Co-operation and Development told Reuters. “For low-probability, high-impact events like climate change, cyber, pandemics – you have to have a new way of thinking.”