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Progress on Europe's pandemic insurance schemes could be rapid despite hurdles

Creating public-private pandemic insurance schemes in Europe will be tough, according to risk specialists, suggesting several years of work. But there are some encouraging signs that development could be quicker.

The current coronavirus pandemic has exposed gaping holes in existing private market coverage, as insurers had largely sought to exclude such a wide-ranging risk from standard policies. Swiss Re AG estimates that the industry's claims bill from the event will be between $50 billion and $80 billion, a fraction of the $12 trillion cumulative loss to global GDP that the reinsurer's research arm, the Swiss Re Institute, estimates the outbreak will cause across 2020 and 2021.

Many agree that the insurance industry cannot handle pandemic exposures on its own, and that the solution is public-private partnerships similar to those that cover other systemic risks such as terrorism. Several European countries have proposed such solutions, among them France, Germany, the U.K. and Switzerland, and they look to have the backing of the world's biggest reinsurers.

A spokesman for Munich Re said via email that the reinsurer's "core strategy" for insuring future pandemics is to "support the development of pooling solutions for the broad market, e.g. public-private partnerships." And Swiss Re CEO Christian Mumenthaler told journalists July 31 that along with its peers, Swiss Re has approached "governments all across the world" because "for all of us it is clear that there must be a better way than what has happened now." He added that there is "quite some momentum here in multiple countries."

Some have also suggested a role for the EU. The European Insurance and Occupational Pensions Authority, or EIOPA, has proposed a Europe-wide scheme that would sit above national schemes, among other solutions. The Federation of European Risk Management Associations, or FERMA, welcomed EIOPA's proposals and urged the EU to get involved.

The key risk pandemic solutions will need to cover is non-damage business interruption, or NDBI. Most business interruption cover only pays out if there has been property damage, and it is uncertain whether the NDBI extensions that do exist will cover pandemic losses. EIOPA said in its staff paper that the current pandemic had shown that there is "a significant protection gap" for NDBI.

A big task

Although many agree in principle that public-private partnerships are the way forward, creating them will be easier said than done.

"Just the scale of the challenge is really going to be a significant barrier," Simon Young, senior director at Willis Towers Watson PLC's climate and resilience hub, said in an interview.

A key issue will be measuring the risk itself. EIOPA said modeling pandemic-related NDBI risks "is very challenging" and that "not many models currently exist," and it suggested spending "significant effort" in improving this.

Young said fully probabilistic pandemic modeling had so far either focused on mortality risk or on broader economic scenarios. "There is a lot of work to be done, for sure," he said. "There is definitely work going on, but I think it will need quite an intensive effort."

Even if the risk can be quantified, it may not be easy to determine how it is shared between the public and private elements. Taking the U.K. as an example, Young said that even if coverage were capped at a certain level, "the government would still need to be ... holding a lot of the risk, just because everybody is going to be claiming at the same time." Swiss Re's Mumenthaler told journalists July 31 that in such schemes the majority of the claims would be paid by governments because the insurance and reinsurance industry "can only take a fraction of that."

A further complication is that, as the current pandemic has shown, government measures play a big role in business interruption. Young said: "There is very little an individual business can do to control the interruption it is going to get from a pandemic, and so I think that increases the difficulty of the private market getting paid what it thinks it needs to get paid to take risk."

There could also be disagreement about which companies are covered. Dirk Wegener, president of FERMA, said in an interview that debates in some countries included the "surprising argument" that limiting coverage to small and medium-sized businesses would reduce schemes' risk. He argued, however, that in excluding larger businesses, "maybe you also exclude the large contributors in terms of premiums." If the aim of the schemes was about strengthening the resilience of economies as a whole, he said, "then we must not exclude certain industries or certain sizes of corporates."

Various European countries are also likely to approach the challenges of setting up schemes in different ways, and some may not even try. EIOPA said via email that efforts in some countries would be government-led, while the private industry would be the main driver in others.

"These significant differences might create some challenges in the development of pandemic insurance schemes in Europe," EIOPA said. The regulator also said that if each European country develops its own solution in isolation, "the result might be that some European countries will be very well-protected against pandemic risks and neighboring countries might have a significant protection gap." A coordinated effort would therefore be "key," it added.

Quick or slow?

Young said he thought the process would be "multiyear," in part because of the focus on getting economies back up and running. He added that if efforts to revive economies were hampered by a lack of suitable insurance for the next pandemic, "that would make things move more quickly," but that "I think we're definitely many months away from that, if not many quarters."

Wegener said the devastating effects of pandemics suggested the need for a faster process, but that "we must not underestimate the complexity and the number of stakeholders to be involved in this."

He added, however, that no ideas about public-private pandemic insurance schemes existed four months ago "and now we have a pretty concrete proposal on the table." A further encouraging sign, he said, was that "we received a lot of positive feedback, a lot of willingness to have this discussion and a lot of willingness to consider our thoughts."