Models for private-public commercial pandemic insurance

Review four proposals for covering business interruptions stemming from a pandemic.

The public sector should evaluate the industry’s potential, non-risk bearing contributions to pandemic preparedness and abilities of resilience-building through risk assessment and mitigation and claims management, according to the Geneva Association. (Credit: eamesBot/Shutterstock.com)

Despite pushing boundaries to develop innovative solutions for new and evolving risks, some events are beyond the insurance industry’s ability to cover, such as business interruptions caused by pandemics, according to The Geneva Association.

“Pandemic business continuity risk was, in general, never possible nor intended to be covered by the private sector,” Kai-Uwe Schanz, Geneva’s deputy managing director and head of research and foresight, wrote in a research brief. “To some extent, this reflects demand-side reasons such as an endemic underestimation of the frequency and severity of pandemics. However, the shortage of supply primarily results from the high level of embedded risk and, therefore, prohibitively high amounts of capital needed to underpin credible insurance commitments, attributable to the unique correlation in the frequency and severity of pandemic business interruption losses.”

As a result, coverage of pandemic business continuity risks with meaningful limits will remain unavailable from the private market because of the high capital requirements, Schanz explained.

Noting the government should be “an insurer of last resort,” he said the public sector should evaluate the industry’s potential, non-risk bearing contributions to pandemic preparedness and abilities of resilience-building through risk assessment and mitigation and claims management. Additionally, government bodies can bring the unique ability to organize viable risk transfers over time through taxation and borrowing.

With this in mind, The Geneva Association offered the following four models for potential public-private partnerships:

1. Direct insurance offered by the government, administered by the private sector

Whether mandatory or voluntary, Geneva explained government insurers would be able to collect premiums and borrow funds when payouts exceed premium pools. The policies could be marketed directly to consumers through government entities such as emergency management agencies or third parties, such as banks, insurers and intermediaries.

2. Government reinsurance backstopping private-sector policies

Public-sector entities could provide reinsurance to insurers that offer pandemic coverage to businesses. If losses reach or exceed a certain threshold, and up to a designated limit, reinsurance coverage would be applied. Similar to the direct scheme, governments would need to borrow funds as well as raise taxes in order to cover the debt.

3. Mandatory social insurance

In this plan, participants would need to make pre-event payments through special taxes or levies, for example. It would offer modest coverage for broad segments of the population, which is typically the goal of public options. In addition, mandatory social insurance would require more uniform non-risk adequate pricing, according to Geneva.

4. Post-event relief with no pre-event dimension

This tactic would see the government offer an ad hoc safety net for those affected by a pandemic. No pre-event financing or commitment on how the funds would be allocated would be set. Funds that are borrowed would become the burden of current and future taxpayers, according to Geneva, which noted this was the model mostly deployed in the wake of COVID-19.

“There is a valuable role for the insurance industry to play — as absorbers of limited risk, professional distributors and claims managers and/or experts in risk assessment, mitigation and prevention — in pandemic risk scheme,” Schanz added.

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