Should public-private models encourage insurers to have "skin in the game"

Pool-Re-CEO-Julian-Enoizi

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.

Pandemic by Numbers

“Certainly in the US, the government is the only entity with the financial resources to help close the pandemic coverage gap”

Indeed, certainly anywhere. In the UK, the numbers alone confirm this. £650 billion is a conservative estimate of lost UK business income due to Covid-19. This dwarfs the £18 billion UK commercial insurers received in gross written premium for the whole of 2019. Moreover, it exceeds all global reinsurance capacity, estimated at $600 billion.

Glaser goes on to say that “The government already plays a role insuring against certain risks that impact the nation’s wellbeing,” citing TRIA in the US and Pool Re in the UK as well established examples. TRIA, along with over a dozen other state-backed terrorism pools, was established when a terrorism ‘coverage gap’ (in other words, a market failure) emerged after 9/11. Then, as now, governments were the only entities with the financial resources to help close the coverage gap – by partnering with industry to enable insurers to offer the products that society needed without jeopardising their own solvency.

A Problem Shared

Most accept that pandemic risk requires a public-private approach, but as Glaser points out, “there’s a debate on which model works best.” For him, however, one vital feature stands out:

“We don’t think the government should carry the risk alone… policyholders and insurers having some skin in the game would create the best outcome”

This is a philosophy shared by Pool Re. In recent years we have pursued a strategy which has emphasised the sustainable transfer of risk from the public to the private sector. With the pool acting as an incubator, carriers are shielded from the uninsurable tail of the peril, but stimulated with the tools and incentives for them to benefit from assuming a growing portion of attritional terrorism liabilities.

The pool reinsures the large majority of carriers who offer terrorism insurance for commercial property in Great Britain. Since 2015 alone, members’ skin in the game has doubled to an annual retention of over £400 million, and £250 million per event; meanwhile, the standalone market in the UK is estimated to have more than doubled in that time. These encouraging signs of growing capacity and confidence is crucial for developing a healthy, competitive, innovative terrorism market able to meet the needs of policyholders and respond to a dynamic risk as it evolves.

Models Maketh Markets

However, as Glaser remarked in the context of challenging conditions for the global industry more generally,

“There are some parts of the market where there’s not enough capacity to serve clients well, and create the right competitive dynamic, so new capacity would certainly be welcome. The question is: what form does it take?”

What indeed. Encouraging skin in the game and accessing capacity from the widest possible range of commercial entities has been vital to Pool Re’s twin goals of growing the market for terrorism risk and building the resilience of the UK economy. The same would need to apply for any prospective model to help address pandemic.

In the podcast, Glaser pointed to how MMC subsidiary Guy Carpenter has recently been instrumental in opening up the CAT bond market. An important example of this was their support in bringing Pool Re’s pioneering terrorism catastrophe bond to market in 2019. This was a significant first step to capital markets’ participation in UK terrorism, representing an unmined appetite we hope will grow and lead to more widely subscribed bonds in the future.

The ILS integrates into Pool Re’s broader retrocession programme, which at £2.4 billion is the largest terrorism placement globally. Combined with the industry’s retention and the pool’s own assets built up over 27 years by members ceding premium, this amounts to a buffer of over £10 billion between a major terrorism event and the taxpayer.

The benefits of this pre-funded system are many and varied. For example, it enables us to invest in modelling a risk which would otherwise remain poorly understood within the (re)insurance world. Modelling pandemics present similarly fiendish challenges to modelling terrorism, since both require modelling behaviours as opposed to risks which conform to the laws of the natural world.

There will be sensitivities around the likely necessity of government data-sharing initiatives, but a public-private approach to pandemic which supports the development of sophisticated models will be the key which unlocks private (re)insurance and alternative capacity, as demonstrated by Pool Re’s advances in terrorism modelling in recent years.

Motivating Mitigation

“We need the market dynamics of the private insurance sector to help promote risk mitigation strategies, and actively engage policyholders through education, and incentives to lower their risk”

A pre-funded model also means Pool Re can invest in partnerships with the Metropolitan Police, the Home Office, and academia to play an active role in promoting understanding of contemporary terrorist strategies and incentivising policyholders to mitigate them. The government’s national strategy for countering terrorism, CONTEST, recognises that ‘the insurance industry has the potential to shape behaviour and improve safety, security and resilience.’

The sooner government begins to apply this logic to better anticipate and contain future pandemics, the better, since as Glaser says, “The insurance industry is well-positioned to make loss-prevention recommendations, even on things like pandemics and reducing your risk to pandemics.”

This will only work, however, if we create the right economic incentives for insurers and policyholders to take ownership for reducing their personal risk profile as they do for better understood risks, and, increasingly, terrorism risk.

Skin in the game at every level of the value chain will mean more stringent pandemic mitigation measures, beginning with integrated risk assessments, response plans, and investment in the resilience and preparedness of our nation’s health infrastructure. All will be vital if we are to collectively navigate the next pandemic more successfully.

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