Double triggers, risk pools are central to pandemic covers
Johannesburg - Global reinsurers are leading the charge to develop pandemic risk solutions that will better respond to the growing frequency and severity of infectious disease outbreaks. Munich Re, with more than 140 years’ experience in the risk industry, is working closely with other industry stakeholders to broaden the availability of specialist epidemic risk transfer solutions which the company had already offered before the current pandemic.
South Africa’s experience with non-physical damage business interruption (BI) claims following the 2020/21 COVID-19 pandemic illustrates the devastating economic impact of this type of risk event. “The estimate for loss of profit claims due to non-physical damage BI comes in at ZAR20-30 billion; claims from a single risk event could exceed a third of the gross premiums written by the non-life sector for 2020,” said Belhassen Tonat, General Manager: Non-Life at Munich Re of Africa. He was presenting at the InsureTalk 10 webinar, attended by various industry professionals. By comparison, the claims paid following the 2017 Knysna fires, considered a very large claim event in the local context, totalled around ZAR3,75 billion.
The economic losses caused by the pandemic and subsequent lockdowns are so severe that it is difficult for the industry to offer affordable comprehensive cover against future outbreaks. If all economic losses should be covered, there is no way around involving governments. Issues around affordability derive from the industry’s traditional methods of pricing for risk. “An insurance premium is based on our expectations around the frequency and severity of the risk event on cover; over the last decade we have seen an increase in the frequency of infectious disease outbreaks to the extent that our next pandemic event could occur less than 10 years from today,” says Tonat. He observed that there were five or six severe outbreaks between 1900 and 1980 compared to 12 or 13 serious outbreak between 2003 and 2021.
To make matters worse, the economic losses associated with these outbreaks are now rivalling the damage caused by severe natural catastrophes. The SARS outbreak in 2003 recorded 8096 cases and 747 fatalities; but led to multi-billion dollar economic losses in Canada and China. In 2015, MERS caused US$2.6 billion damage to the South Korean tourism economy despite only recording 186 cases and 36 deaths. And an Ebola outbreak in 2014 caused economic hardship for many fragile African economies, including Liberia, Sierra Leone and even Tanzania, which suffered from a regional tourism downturn despite not experiencing an outbreak of the virus.
The combination of rising frequency and greater economic cost will result in epidemic risk premiums becoming too pricey. A basic calculation shows that a small business might have to sacrifice not less than 5% of the desired sum insured to obtain cover against loss of profit from future epidemic events – so many might choose not to cover all their revenues but only a certain level e.g. corresponding to their fixed expenses. Another major issue is that pandemic sits outside the construct of a traditional insurable event. Higher frequency risk events with such an enormous global accumulation potential end up contradicting the basic tenets that make insurance possible. Thus call for new innovative ways to increase the insurability of pandemics.
It is clear that reinsurers and other insurance industry stakeholders will have to innovate to devise covers that perform against future pandemic risks. “If we proceed on the assumption that we cannot insure against this risk, we will fail in our role to allow economies to grow. Our job is to push the boundaries by using innovation and technology to make this risk insurable,” says Tonat. Success in this regard will allow the broader insurance industry to contribute towards achieving the economy-centred UN Sustainable Development Goals. “We must work together to devise insurance solutions that give investors the confidence that major risks have been mitigated or transferred, thus making both the economy and society more resilient,” he says.
While the size of potential economic losses exceeds the size of insurance companies’ balance sheets, leaving no choice but to involve governments if all economic losses should be borne, Munich Re is working closely with other industry stakeholders to broaden the availability of specialty epidemic risk covers for individual exposed businesses. While the insurance capacity naturally is very limited, as a global reinsurance company, Munich Re is well-positioned to involve other stakeholders such as financial market investors to ultimately bear the risk and thus increase the amount of capacity which can be offered to the market place. This will happen in the background and not be visible to the insured, however, an important first step is to recognise the difference between the economic and epidemical triggers associated with an infectious disease outbreak. Forward modelling of pathogens can then be undertaken with reference to more than 70 inputs, including socio-economic factors, climate zones, animal spread and country preparedness, among others. The reinsurer works closely with bodies such as GIDEON and the WHO and private firms such as Silicon Valley-based Metabiota and has access to data covering more than 30,000 disease outbreaks. This rich data allows the reinsurer’s actuaries to more accurately price for epidemic risk.
The latest epidemic risk transfer solutions are being built around a double trigger event, which sees insurance contracts respond based on the occurrence of both an epidemic and economic event. “We are willing to put this solution to the market; but are faced with severe capacity constraints,” says Tonat. One way to address this constraint is to also partner with governments. The reinsurer is already in discussion with various South African insurance bodies to explore risk pools and the onboarding of the government as an insurer of last resort in the pandemic space. Risk pools are a type of reinsurer facility in which governments just as well as private sector investors could stand behind the insurance and reinsurance companies to enable them to offer protection to the market.
“Together we can make the world more resilient,” concludes Tonat. “Our challenge is to think out of the box and push the boundaries of insurability. A combination of reinsurers’ financial capacity, brokers’ and insurers’ reach into the non-life insurance market place; and innovative ideas will see us home”.