Increasing society’s resilience against pandemics
Drivers of pandemics
Higher mobility levels make outbreaks of infectious diseases move faster around the globe. In 2018, there were 4.2 billion air transport passenger journeys – compared to 310 million in 1970. Air travel makes it possible for someone to travel halfway across the globe in less time than it takes for many diseases to incubate, making it extremely difficult to prevent their spread.
This enhanced mobility helped propel coronavirus' swift transfer from China to more than 60 countries in just two months. Less internationally connected and less densely populated cities and countries for example in Eastern Europe have been less affected than global hubs like New York or London.
Increasing urbanization is also contributing to a higher epidemics frequency. As the world’s population continues to grow it is just natural that the number of outbreaks and the people affected also rise. People are living closer together due to increasing urbanisation and global population growth. By 2050, 68% of the world’s population is expected to live in urban areas, according to the United Nations (UN).
Climate change may also be fuelling the frequency of epidemics or pandemics as warmer temperatures promote for example the spread of mosquito-borne diseases. By 2080, extreme global warming could expose 1 billion people to mosquito-borne diseases in previously unaffected regions such as Europe and East Africa, according to the World Economic Forum Global Risks Report 2020.
Epidemics and pandemics can quickly reshape economies. The World Bank forecasts that the global economy will shrink by 5.2% this year due to COVID-19. This would represent the deepest recession since the Second World War.
Insurers take a hit
Specialist re/insurance marketplace Lloyd’s of London has estimated that the non-life insurance industry faces as much as $107 billion of losses from the COVID-19 pandemic to the 2020 underwriting year. Including investment portfolio losses of estimated $96bn, the total projected loss to the insurance industry will be $203bn.
While COVID-19 will certainly represent a large loss event for the insurance industry, many businesses worldwide will not have policies in place that respond to the disruption caused by the pandemic.
Policymakers have therefore started to examine longer-term solutions to address the lack of financial protection against pandemic-related financial losses. While the situation is still fluid, there are some concrete proposals as well as one market-ready solution by Munich Re which Lockton is taking part in.
Several pandemic solutions are being discussed that are based on public-private partnerships. Such an approach could resemble the one taken in other risk areas such as terrorism or floods.
In the US, for example, New York Congresswoman Carolyn Maloney has introduced the Pandemic Risk Insurance Act (PRIA), a federal backstop for pandemic-related business interruption insurance modelled after the Terrorism Risk Insurance Act (TRIA). Insurers’ participation in the programme would be voluntary. Those wanting to participate would offer pandemic-related business interruption and event cancellation coverage, and would be reimbursed by a federal backstop for some of their losses.
This framework requires aggregate industry insured losses to exceed a $250 million aggregate to trigger the programme. As part of the plan, US taxpayers would absorb 95 percent of insured losses above each insurer’s deductible. The bill establishes a $750 billion annual aggregate cap for federal compensation. If losses exceed this cap, pro-rata payments would be allocated to insurers. The bill relates to protection against business interruption as well as event cancellations.
In parallel, three insurance industry trade groups have presented an alternative proposal for the US. The Business Continuity Protection Program (BCPP) would provide business revenue replacement assistance that would reimburse up to 80 percent of payroll, benefits and expenses for three months, triggered by a presidential viral emergency declaration.
Meanwhile in France, finance minister Bruno Le Maire has set up an industry group to look at how pandemic cover can be provided in the future. One option would see France’s private insurers providing business-interruption cover of up to 2 billion euros ($2.2 billion) a year in total for small companies hit by the fallout of any future pandemics. The government would step in if losses exceed the limit via public reinsurer CCR.
Lloyd’s of London has presented three ‘open source’ frameworks on July 1, 2020, two of which require government and (re)insurance industry partnerships. If implemented, these three frameworks could provide customer protection for further waves of COVID-19 (ReStart and Recover Re) and other future pandemics, as well as strengthening societal resilience against future systemic catastrophic events (Black Swan Re), according to Lloyd’s.
ReStart is a non-damage business interruption solution, which would be triggered in case of loss of revenue without a physical damage trigger protecting against future waves of COVID-19, focusing specifically on supporting small and medium-sized enterprises (SMEs). The solution would pool limited capacity across a number of Lloyd’s market participants. The product would support businesses when reopening, offering a range of limits that ensure it is affordable for customers, without requiring any government support.
Recover Re sets out a proposed ‘after the event’ insurance product framework that could provide immediate relief and cover for non-damage business interruption over the long-term, including the current COVID-19 pandemic. If implemented, this would allow the injection of commercial and government funds into the economy, providing relief to customers with limited borrowing capacity.
Black Swan Re is a reinsurance framework for government and industry partnership that could improve protection for customers against the impacts of systemic catastrophic events. These include another pandemic, a global supply chain disruption, or the interruption of critical infrastructure or utilities. The framework would provide reinsurance for commercial non-damage business interruption cover through industry-pooled capital, backed by a government guarantee to pay out if ever the pool had insufficient funds.
Meanwhile, insurance veteran Stephen Catlin has formed a group of experts to explore other options. One of the options focus on an expansion of UK government-backed terrorism reinsurer Pool Re.
Pool Re offers cover for terror via private insurers to businesses and can access government funding if an event exceeds its capacity. In return, the government receives an annual fee from Pool Re. Pandemics could potentially be included in Pool Re’s remit. In 2018 Pool Re already extended its cover to include material damage and direct business interruption caused by acts of terrorism through a cyber-trigger.
Pandemic insurance had been available prior to the Covid-19 outbreak but at that time, many companies thought the risk too remote to justify buying the cover. As this perception is likely to have changed since the Covid-19 crisis, Lockton has partnered with global reinsurer Munich Re to offer businesses protection against epidemics/pandemics.
In cooperation with Munich Re, Lockton can offer solutions covering specific risks associated with epidemics/pandemics including but not limited to business interruption, supply chain risk and fixed costs. Coverage is structured on an indemnity basis and early liquidity options are available for businesses operating in hospitality, retail, manufacturing and mining. Munich Re are now starting to consider other industries including real estate, construction and entertainment.
The coverage is essentially bespoke and can be manipulated for a client’s needs based on various trigger options.
Alongside the provision of insurance, customers are provided with access to external epidemic expertise including support in containing outbreaks, or in preparing for future epidemics with the help of virologists and epidemiologists.
Events are insured in case of occurrence of an epidemic outbreak trigger event within the covered area that causes a loss of gross profit at the insured property within the epidemic period, whereby the epidemic outbreak must have started in the outbreak area.
For further information, please contact:
Adam Watson, Partner
Tel.: +44 (0) 20 7933 2022
Matt Humphries, Broker
Tel.: +44 (0) 20 7933 2044
As governments begin to relax Covid-19 lockdown rules, companies are working on plans to return operations back to normal while ensuring the safety of employees and clients.
From a technical perspective, working from home has worked out surprisingly well for most during the pandemic. The picture is likely to look less positive from a mental health perspective. Businesses should address potential issues as part of their duty of care to staff.
Having worked in insurance since the early 1980’s, the one thing hard markets have taught me is that they rarely have the same trigger but the fundamental effects are fairly similar: Property classes suffer in the short term but liability classes suffer for longer. The consequences of the COVID-19 outbreak will most likely follow this pattern.
The insurance market is becoming more challenging for buyers as carriers look to improve their underwriting profitability and only offer cover when they fully understand the clients’ exposure. Insurers are reducing their capacity in some risk areas and tightening their policy terms and conditions. As a result, insureds need to spend more time preparing for renewals and disclose more information to persuade insurers and secure the best possible outcome.