Pandemic cover is not an insurance concern, OECD told

The coverage of pandemic risks fails the core tests for insurability and can only be solved by public private partnerships - if global governments understand that they need to play a full part.

This is according to Scor chair and chief executive Denis Kessler and Allianz Versicherungs chief executive Frank Sommerfeld, who were both speaking at an event hosted by intergovernmental economic body the Organisation for Economic Co-operation and Development (OECD).

Speaking during a panel session on the insurability of pandemics, Sommerfeld said the challenge for insurers to look to assume some of the liabilities created by a pandemic were significant.

“It is an accumulation risk and as such, it does not meet the standards of insurability in terms of the ability for diversification,” he explained.

“The World Bank has estimated the global loss of production is valued at $4.5bn. That figure is one hundred and fifty times the value of global [business interruption] premiums.”

Capital considerations

Looking to a potential business interruption (BI) solution, Sommerfeld said the capital requirements for the accumulation risks that a pandemic would present to the industry would be huge.

“From a premium point of view, the level of premium that would need to be charged would simply be so unattractive,” he said.

“A public private partnership may well be a solution, but we still have not talked about the different approaches that might be taken and what can be done.”

In terms of the challenges the insurance industry would face, Sommerfeld said the first was whether any solution would be operated as a simple capital collection agency, or as a pure insurance proposition.

“Both would be possible but a decision would need to be made,” he added.

“Would the programme be voluntary or mandatory? If it were voluntary and only a fraction of businesses bought the cover and there was an event, the pressure would fall onto governments to provide assistance and it would not be fair on those companies who had purchased the cover.”

Sommerfeld added: “The pandemic has shown that a lot of the claims have come from those firms which have not been directly affected.

“Restaurants, shops and cafes have been forced to close but - for instance - travel agents have been able to operate, it is just they have not had any products to sell. If you opened any solutions up for indirect claims, the liabilities would be massive.

“There is clearly not a one-size-fits all solution given the differences in sizes of businesses.

“There is also the question around when does a pandemic become a pandemic? What is the trigger? The World Health Organisation may declare an infection a pandemic, but that is a subjective decision and there would need to be a clear standard as to what constitutes a pandemic.”

He concluded: “Is it a national, regional or worldwide event? We would need a set of minimal standards that would create the ability to build a common view of what would need to be done and how it could be addressed.”

Inability to insure

His views were backed by Denis Kessler, who said the reinsurance sector was clear in its stance and had reacted to remove infectious disease cover from its policies.

“This is not a case of how to prevent a pandemic, it is not a case [of] how to reduce it or to fight the pandemic, as to why the industry cannot create a solution,” he explained.

“It is not a lack of goodwill - we are not stupid, or stubborn.

“It is my belief that the industry cannot insure a pandemic. The conditions of insurability are not met.”

Kessler said the losses from a pandemic would all arrive together and would be deemed as serial risks.

“It multiplies and it is global,” he added. “It is the worst of the worst possible risks.”

Government intervention

He added that the other issue for the market is that national governments are the cause of many of the risks that insurers were being asked to mitigate.

They imposed curfews and lockdowns, for example, to tackle the spread of the pandemic - with this came the economic losses.

“For a reinsurer, the decisions of governments are not predictable,” he explained. “In Europe, we have 27 governments with 27 different responses to the pandemic.

“At the end of the day, the [gross domestic product] of a country is not insurable. A hurricane, flood, earthquake or an invasion of crickets is fine. How do you define a pandemic?

“As a reinsurer, I like a start and an end to an event. It is so difficult to define and declare an end to a pandemic.”

Kessler added that should the (re)insurance sector step in to meet the coverage needs arising from situations such as a pandemic, given the impact the actions of governments would have on loss levels, it would create a moral hazard.

“If the governments knew that insurers would pay the bill, it will adapt their response,” he explained. “A pandemic is similar to property damage in a war and war is not insurable.”