Searching for cover

Governments, insurers and businesses around the world are discussing how to improve risk protection for the next pandemic

By Wendy Pugh

A film industry group representing companies responsible for award winners such as The Hurt Locker and the Lord of the Rings trilogy is among organisations taking up the cudgels over insurance coverage during pandemics.

The Independent Film and Television Alliance (IFTA) includes firms outside the studio system that have produced 70% of Academy Award Best Pictures over the past three decades. But without diseases cover financing is not available and productions come to a halt.

“The United States has already seen a loss of films this year in the neighbourhood of 250-400 that have not been produced that normally would have been,” IFTA Chief Executive Jean Prewitt told a video roundtable last month.

“Production cannot happen without insurance against communicable diseases, which was always available in the past, but which since March has been explicitly excluded from all of our companies’ production insurance policies.”

IFTA is among groups throwing their weight behind the proposed Pandemic Risk Insurance Act (PRIA) championed by New York Congresswoman Carolyn Maloney, who hosted the video roundtable.

The Act would provide a public-private partnership response similar to arrangements in place for terrorism, reflecting the reality that pandemic business interruption risks are beyond the capacity of the insurance sector to take on alone.

The concept has support from Marsh & McLennan Companies and the Risk and Insurance Management Society (RIMS), while the roundtable also included proponents of alternative plans involving government backing.

Chubb, which participated in the event, has proposed a two-tiered approach, with government taking on the lion’s share of the risk. Its model includes parametric cover to speed funds to the small end of the market and a separate public-private model for larger enterprises.

Similar discussions are well underway in Europe and the United Kingdom, where the terrorism-focused Pool Re is suggested as a model for a new Pandemic Re. Respected insurance veteran Stephen Catlin, who has raised concerns over reputational damage to the industry from COVID-19, is chairing a steering group to develop possible solutions.

Lloyd’s has also distributed a white paper in global markets which outlines three models, labelled ReStart, Recover Re and Black Swan Re, to deal with immediate and long-term challenges from events such as COVID-19.

The market’s General Representative in Australia, Chris Mackinnon, says the paper has been tabled as a discussion point with the Insurance Council of Australia (ICA) board, and Lloyd’s has also engaged on the subject with the Australian Prudential Regulation Authority.

Munich Re says governments are preoccupied with the complex and ongoing nature of the COVID-19 pandemic, but should also focus on how models such as pools could provide cover in the future.

While such efforts appear to be gaining greater traction in the US and Europe, the reinsurer also notes activity in other parts of the world.

“We are aware that there are several ongoing discussions regarding the possibility of pandemic pools for future pandemics in the Asia Pacific region,” General Manager Non-Life Australasia Scott Hawkins told Insurance News. “However, these are still in the preliminary stages of discussion.”

Existing cover shortcomings have been highlighted in the US, UK and Australia by court battles over business interruption claims, with various issues in dispute, while the industry globally has highlighted it would face an existential threat without pandemic exclusions.

US media have reported more than 1000 shutdown-related matters starting to work their way through the courts, and the insurance industry has also had to fight the threat of retroactive legislation.

Whatever the judicial outcomes, and however much they may favour insurers that never priced for a global pandemic, there is rising momentum to consider action around better assisting businesses in the case of future threats.

“It is important that we have a solution so that customers can be protected in the event of another pandemic,” the British Insurance Brokers’ Association said after a UK High Court ruling on wordings that provided mixed results for policyholders and insurers. “It is our belief that a public-private partnership would be the best means.”

In Australia, ICA has commissioned a report from consultants Finity on options for the future as it looks toward the longer-term issues.

Finity’s mandate is to identify insurance-related options the Federal Government could undertake to mitigate economic effects of future pandemics, including “where insurance-based mechanisms may be relevant” and the potential role of the private sector.

The core question is whether the Government should form some sort of public-private partnership to make pandemic coverage available through general insurance policies.

Frameworks outlined start with a status quo baseline and progress to a Government-backed facility that could be modelled after terrorism cover in Australia and overseas.

Middle options include a more targeted approach, such as UK and European Union programs for trade credit. Alternatively, a new form of business protection to provide a short-term limited benefit, potentially over one to three months, could be considered.

Finity Principal Rade Musulin says further investigation and modelling, and public policy decisions, are required before any path can be pursued as the best solution.

“The issue is not one that can be easily solved and it does require quite a bit of thought and study to try to create a framework for funding these events in the future,” Mr Musulin told Insurance News.

Governments spending billions of dollars on pandemic support programs such as Jobkeeper may have a strong incentive to tap insurance expertise for a public-private approach, while the extent to which the industry should participate remains an open question.

“Insurers have a motivation to offer insurance where they can, and I think insurers are mindful of the expectations of their customers for coverage,” Mr Musulin says. “I don’t think this is a case where the insurers would want to just wash their hands of the whole thing.”

Finity says solutions would need to be crafted carefully to ensure a well-functioning Australian insurance system that delivers cost-effective products in many lines is not disrupted, while business interruption presents its own challenges.

“It is not clear to us that insurance involvement would be practical unless steps are taken to streamline products and reduce the complexity of coverage, pricing or claims handling,” it says.

“This is because the current way business interruption cover is provided involves relatively complex processes, such as determining the amount of turnover which would have occurred without an event, which may be difficult to administer in a situation where a large proportion of businesses in the country are experiencing a loss event.”

Issues for any private-public arrangement include who it is targeting, whether it would be compulsory, should it only cover a COVID-19-type pandemic, the funding mix of premiums, levies and government taxes and should it be “post-funded” after an event.

The Australian Reinsurance Pool Corporation (ARPC), among existing arrangements highlighted for comparison, started in 2003 after the Terrorism Insurance Act was passed by Federal Parliament in July that year. The pool was needed as private terrorism cover disappeared following the September 11 2001 attacks in the US.

Marsh & McLennan Country Corporate Officer Scott Leney says pandemic risk is a top issue for clients globally and the ARPC and other international models point to a way forward.

“We think that the right solution is a collaboration between the industry and the Government to come up with an insurance pool similar to the terrorism insurance pools that have been created around the world,” he told Insurance News. “It is something that Marsh is advocating in all the major countries around the world, including here.”

Pools and other government-backed programs are also used around the world to cover catastrophes including flooding and earthquakes, and have been flagged for their potential to extend to a wider range of risks, with varying funding arrangements.

IAG Chief Executive Peter Harmer, who is retiring from the company at the start of November, says governments are clearly best placed to meet costs from pandemics, which present different challenges compared to terrorism risks.

“Terrorism is a more isolated event in a sense, in that it might be, for example, an attack on a particular city, whereas a pandemic obviously can hit the entire country, and as we have seen in the last couple of months around the world,” he said.

“There is a size of loss that becomes quite systemic where governments need to act as the shock absorber. That is what we are seeing now in this COVID-19 world.”

Insurers emphasise the support they have provided during the pandemic, assisting customers facing hardship, and paying claims to help people get back on their feet after all manner of disasters and losses that don’t stop because of a disease outbreak.

QBE Executive Chairman Mike Wilkins says the pandemic has nonetheless also shone a spotlight on some areas where insurance policies do not respond.

“This should trigger a broader discussion within the industry, together with regulators, governments and others, about how we can better plan for and respond to low probability, high impact events in the future,” he says in the group’s half-year report.

Munich Re says state-backed risk pools would allow insurers to participate with limited capacity, while contributing know-how in assessing risks, distribution and claims settlement.

The firm suggests mandatory coverage, given voluntary arrangements often have low take-up rates and are prone to adverse selection. It says parametric options could be triggered by an epidemic declaration by an official body and legally ordered lockdowns as part of a broader solution.

Munich Re notes the problem with pandemics is not just the lack of diversification across regions and types of business, and the impact on assets as well as claims. An issue is also the unpredictability of government responses that make it difficult to price the risk.

“The fact that almost 100% of the business interruption losses have so far been caused by political decisions, by the so-called lockdown decisions, is another reason why they are not really insurable,” the reinsurer’s Chief Underwriter Stefan Golling says.

Looking ahead, increased funding for research and mitigation measures may help to make private sector insurance more viable in future, as has happened to some extent in terrorism. But pools are still required in that market and uncertainty remains.

In Australia, Federal Treasury declined to specifically comment on consideration of pandemic cover when contacted by Insurance News, but it’s on the radar.

“Given the impact of the COVID-19 pandemic, Treasury is continually monitoring the operation of the domestic insurance market, as well as studying international insurance market developments,” a spokesman said.

RIMS Board Director Patrick Sterling says risk management is all about being proactive, and without a public-private program a future pandemic could be catastrophic.

“While it may take years to fully put a dollar amount on the losses due to COVID-19, renewals are happening now,” he told the US roundtable. “How can risk professionals prepare our organisations for next year and years to come without a solution today?

“Operating with this level of uncertainty is harmful to business.”

insuranceNEWS October/November 2020