Insurance must be part of the solution for the next crisis - pandemic or otherwise
Authored by Pool Re CEO Julian Enoizi
Earlier this month, I listened to The Insurer’s podcast series with Dan Glaser. This is the first of two blogs reflecting on comments made by the President and CEO of MMC, which for me stand out for getting straight to the heart of the issues that will define our industry in the years ahead.
In the first blog of this series, I outlined how a well-designed public-private arrangement would enable the involvement of the (re)insurance industry in building society’s resilience to future pandemic risk – rightly considered ‘uninsurable’ without state involvement.
Prevention vs Cure
Without such a partnership in place this time round, Glaser notes that:
“Governments have acted quickly [to support economies during the pandemic], but it’s all done after the fact. Building in that level of commitment and organisation would certainly add more resilience”
The Prime Minister recently announced to Parliament that despite a generous furlough scheme supporting over a third of the UK workforce during lockdown, “tragically there will be many, many job losses.” Meanwhile, the Chancellor has told us to expect “a severe recession”, likely the deepest since WWI according to Treasury figures.
There was no way to prevent Coronavirus from being an economic disaster. As Glaser observes, however, its effects would have been less severe with a greater level of “commitment and organisation” between the public and private sectors as regards risk transfer, mitigation, and restoring confidence.
Specifically, a public-private insurance pool, standing by with large reserves and pre-arranged lines of credit to rapidly channel liquidity to policyholders might have limited a vicious spiral of economic multiplier effects. Designed appropriately, it might also have been a safer, faster, and more consistent administrator of the government’s business loan schemes, and a more practical way to recoup costs through the payment of premiums.
Having insurers at the heart of recovery operations in these ways would have afforded an elasticity for the economy to “bounce back” more quickly than sadly seems likely now.
In a recent report advocating the formation of public-private partnerships, Marsh, part of the MMC group, noted that:
“The pace of the recovery will depend on the nature and degree of uncertainty in the marketplace… [a PPP provides] critical assurances to lenders and equity markets, helping to accelerate economic recovery. It can also limit the financial impact of a future pandemic by absorbing the initial shock, enabling businesses to retain employees and meet financial obligations through the peak of uncertainty”
With no such facility in place, businesses, enduring profound uncertainty, perceive insurers to have deserted them in their hour of greatest need. It is a sign of these extraordinary times that this feeling, understandable in many ways, can co-exist with Covid-19 likely being the costliest catastrophe in our industry’s history.
The logistical impossibility of insuring pandemics was well known by insurers, who have excluded the risk for years – some less rigorously than others. But the industry as a whole is paying a high reputational price for allowing a time bomb of mismatched expectations to grow between itself and its customers, who cannot see why their BI policies are failing to trigger.
This mismatch is borne out by figures showing that around 1% of hospitality businesses have received a positive response from their insurer after filing a BI claim. The hospitality sector employs nearly 1 in 10 people in the country.
Small, medium and large businesses, if they have not already been forced to close, face an existential threat in the months and years ahead. John Ludlow, CEO of Airmic, recently reflected on deteriorating relations between corporate clients and insurers and warned that the insurance industry was at a “critical juncture”. Retreating behind wider and more robust exclusions is not an option for an industry premised on being society’s financial safety net.
“If the same thing happens in 5 or 10 years and we don’t have constructive solutions available, it would kind of be unforgiveable, for the industry and for politicians”
Having constructive solutions available means having insurers at the heart of the recovery from the next national crisis. In practice, this will require viable BI coverage for what Glaser in the podcast calls “mega-tail events, the black swan situation” – be it a pandemic, a systemic cyber event, a terrorist attack, or liabilities associated with climate change and geopolitical turbulence.
For this reason, creating a public-private facility to backstop pandemic risk alone, significant as this would be, would only see a similarly damaging pattern play out next time a catastrophic risk manifests and a crippling protection gap is revealed. It is not the trigger, but the systemic consequences we must partner with the government to address.
Before Coronavirus, this might have seemed fanciful. No longer. The way in which government has naturally defaulted to playing insurer of last resort by underwriting the economy to an extent unknown in peacetime has tectonic implications for the interplay of risk-sharing between the state, the private sector, and the individual.
Already, leading industry figures have promoted the idea of evolving Pool Re into an ‘umbrella’ facility, perhaps a ‘Resilience Re’, to benefit from economies of scale by not only uniting existing state-supported pools, but creating further pools to facilitate (re)insurers’ participation in risks for which there is currently little or no commercial market.
Indeed, with uncanny timing just before the crisis, a policy document committed government to ‘consider its stock of contingent liabilities and investigate where it may be appropriate to expand the scope of current pooling schemes.’ Pool Re would seem a logical place to start. An industry-wide mutual already guaranteed by an HMT loan facility, it is a ready-made, trusted conduit between government and industry, with proven success in public-private risk transfer, embedding risk mitigation, and responding to a dynamic risk as it evolves.
In another recent report by MMC, co-published with Zurich and the World Economic Forum, Saadia Zahidi (Managing Director of the World Economic Forum) notes that,
“Leaders must work with each other and with all sectors of society to tackle emerging known risks and build resilience against the unknown”
A ‘Resilience Re’ or similar embodies this principle. Businesses would have access to comprehensive, affordable protection against BI losses resulting from systemic risks which would otherwise be excluded or prohibitively expensive. Further, cover could remain broadly stable, even after a significant event, whilst transparent, consistent policy wordings and definitions would avoid the host of bankruptcy and trust issues associated with denied claims and litigation against insurers.
For (re)insurers, such an approach promises profit and innovation opportunities associated with being able to incubate markets and products for emerging and catastrophic risks, whilst reasserting their credentials as a sector able to keep its promises to society in even the most challenging circumstances.
Meanwhile, an integrated public-private structure for managing disaster risks would allow the government to monetise its guarantees as it does for terrorism. Further, the state would be in a position to realise the full potential of the risk mitigation expertise of the insurance industry (as outlined in the first blog of this series) and as noted above, work with the industry to smooth economic damage when the next disaster strikes. As Dan Glaser knows, it would be ‘kind of unforgiveable’ if we can’t.
Pool Re’s purpose is to enable the UK insurance market to offer terrorism cover to any commercial property that requires it. Central to this is the integration of Pool Re’s cover with the underlying property policy which ensures that there is no gap in the cover provided.
Pool Re was designed to insulate the taxpayer from potential financial losses arising from acts of terrorism. It has achieved this effectively, to date paying £635m in respect of 13 claims arising from certified terrorism events in the UK since our establishment. It has never called on the Government’s guarantee.
By providing foundational stability at a reinsurance level, Pool Re has created an environment for the commercial market to re-establish itself, following the market failure in 1992. This stability creates and sustains access, liquidity and confidence to generate the conditions for the private market to gradually write a growing portion of terrorism risk.
Helping UK businesses build resilience against terrorism risk is a priority for Pool Re who have developed SOLUTIONS an in-house centre of excellence created to support Members and policyholders better understand risk awareness, modelling, and management. They have also invested in a range of initiatives with Government security and intelligence agencies to provide tools such as an information sharing platform.
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