Analysis: Constructing Pandemic Re

Insurance experts from across the market have given universal support to a Pandemic Re solution in light of the coronavirus crisis that has swept through the country in recent weeks.

However, numerous questions remain about the level of risk any new vehicle would take on, its funding structure and whether it would be compulsory to use it.

The highest profile development came on 21 April with the announcement that a steering group had been set up in the UK chaired by Convex leader Stephen Catlin and featuring numerous insurance industry heavyweights (see box 1) with more poised to come on board.

Its main objective is to make sure the industry strengthens its response to future pandemics and to this end it will work alongside Pool Re which will advise on the best structure for future solutions.

It is the culmination of weeks of speculation and not the only potential route to the formation of a Pandemic Re.

From almost the moment that prime minster Boris Johnson ordered the UK into lockdown the industry began to turn its attention to a new offering along the lines of those delivered by the likes of Flood Re and Pool Re.

As part of its annual results released on 26 March Lloyd’s CEO Jon Neal confirmed that the organisation had written to the Treasury to volunteer its resources and capabilities for solutions that might help now and in the future.

In a ‘Dear CEO’ letter to the market on 17 April Lloyd’s reported that it was looking at range of medium to long-term initiatives including a Pandemic Re style solution.

“We are talking to HM Treasury, together with regulators and our business partners around the world about how this might work as clearly it will require government and the insurance industry to develop solutions together,” Lloyd’s revealed.

Scale

There will be a lot of considerations for a Pandemic Re, beginning with scale. The key will be to agree the structure of what level of risk the industry will retain and what the government will take.

“How much would you need, $100bn?” asked Michael Tripp, head of insurance at Mazars. “Depending what you want to cover the sums of money are potentially so vast.”

The insurance industry has been heavily criticised on business interruption claims in particular during the Covid-19 crisis and suffered many damaging blows to its reputation. The Association of British Insurers and its members have consistently pointed out that most BI policies did not include pandemics.

“As a phenomenon it [pandemic] fits the Pool Re and Flood Re uninsurable catastrophe loss [type],” said Paul Upton, industry consultant at Brookhurst Advisory.

“If the market needs to move to a more inclusive wording to cover this going forward then it will need to be reinsured in a separate vehicle as it is not something you can underwrite your way around,” Upton stated.

“It has got to be elective,” he insisted suggesting that all insurance policies come with and without the option of buying cover through any pandemic vehicle.

“It is all around what is actually covered and that needs careful thinking about. You cannot give a blanket cover,” Upton continued.

However, others have argued that Pandemic Re take up should be compulsory.

Broker Paul Beck, managing director at Direct Insurance Corporate Risks, pointed out that previous products have failed because nobody had bought them as he called for the “good idea” of government backed Pandemic Re to be compulsory.

“It has to be brought forward when it is fresh enough in people’s memories for people to understand the logic of buying it and overcome the distaste of it being made compulsory,” Beck said.

Funding

An essential consideration will be how to fill any eventual Pandemic Re pool with money. Funding for a total loss across the book with everyone being hit on a 50 or 100 year basis will be challenging.

Aston Lark CEO Peter Blanc has called for a small levy on every insurance policy. This element of compulsion with everyone contributing would generate significant funds and mean the insurance industry could start to fund for future losses most quickly, he argued.

Other considerations include defining a pandemic, such as agreed transmission and case fatality rates, through to the basis for triggering the coverage to payout.

For it to work the industry would also need to be confident, particularly if insurers were being asked to keep higher retention, that the government would put in place risk management measures in order to protect the industry and its customers.

Pricing the output will undoubtedly be challenging for the market.

The industry will have to work out how to differentiate between high and low risks. Experts flagged hospitality businesses and those where people are required to congregate as potentially higher risk. However, office based businesses have also closed in past weeks and not all of them have been able implement remote working.

One suggestion was that firms should have to buy blocks of cover, for example in units of £100,000, thus ensuring that there was absolute clarity of what they would receive were the country to be hit by a Covid-19 style event again.

Taskforce

The project will ultimately be driven by a government taskforce, according to one management consultant, who declined to be named.

“There is no reason why this couldn’t be put in place quickly, it is probably down to government appetite rather than ours,” he said. With the government having more immediate priorities it will be a few months before they are ready to consider Pandemic Re in earnest he predicted.

Experts approached by Post suggested a taskforce should consist of the Treasury, the Bank of England, regulators, Lloyd’s, the Association of British Insurers and senior industry figures.

No matter the timing the ability of the insurance industry to act as a transmission vehicle getting the money to businesses efficiently was universally agreed.

Blanc was adamant that Pandemic Re was “doable”.

“Insurance creates a pooling mechanism for terrorism, pandemics any risk or exposure that is beyond the scope of primary insurance,” he maintained.

“If you get this right you use the insurance companies’ existing infrastructure with Pandemic Re acting as the primary reinsurer and the government acting as reinsurer of last resort should those funds be exhausted.”

Cat Re

Any future taskforce though will have more questions on its hands. With Pool Re and Flood Re already in existence, why create Pandemic Re as a standalone at all and why stop there. Catastrophe Re may well be worth considering, particularly to keep the infrastructure as simple as possible. Cyber is another that many experts would add in.

A catastrophic failure of the UK’s internet would lead to calamitous losses. “Are we going to wait for that to happen and then cry out for Cyber Re?” Blanc asked.

There is no doubt that there will be discussions about the best way forward as society needs to think about how it could cope better with another pandemic.

After the criticism so far in this crisis there is a mass consensus that insurers need to respond in some shape or form.