Covid-19 raises pandemic protection gap questions

In the aftermath of Covid-19, insurers are unlikely to widen their coverage to include pandemics. Many, including Hiscox in the UK, warn the sector cannot cope with the vast losses. While parametric pandemic insurance has been offered in the past, it has not been widely adopted. Such products are unlikely to cover events in the magnitude of Covid-19.

The novel Coronavirus has pushed insurance and risk markets to their limits and poses a significant risk management and transfer challenge. The pandemic will prompt governments around the world to introduce additional layers of risk protection to guard economies against losses. Countries across the Asia-Pacific region are exploring ways to protect their economies.

The answers are likely to lie at government level. With the insurance sector and governments unable to absorb pandemic losses on their own, collaboration is viewed as a way forward. Insurance groups and trade bodies hope governments will tackle the issue and work with insurers to develop backstops in the years to come.

Parametric solutions at government level are viewed as one possible solution. Parametric insurance cover is available for Pacific Island States through the Pacific Island Catastrophe Risk Assessment and Financing Initiative (PCRAFI). The schemes cover losses for earthquake and tropical cyclones, but insurance experts say they could be reconfigured for pandemic risks.

Protection gap entity schemes (PGEs) - or risk insurance pools - are viewed as another option. The schemes, collaborations between the insurance industry and public sector, have been set up around the world to offer a layer of protection for natural catastrophe risks, such as earthquakes, and other major events, including terrorist attacks.

Peter Jackson, director at Lockton Wattana Insurance Brokers in Thailand, says: “Covid-19 has been the trigger for governments to relook at Protection Gap Entities. The US, UK, France, Germany, Australia are all looking at pandemic PGE solutions. That’s the right action to take, Covid-19 is not going to be the last pandemic we will face.”

Jackson adds: “More broadly, governments will have learned a lot from the Covid-19 experience, how they manage crises, and that includes how they manage the financial consequences of a major catastrophe. While it makes sense to develop pandemic related PGEs, the next big catastrophe may not be pandemic but something else. The danger is PGEs, like other insurance, may lag behind the catastrophe we next face.”

George McGhie, head of the Asia-Pacific captive practice at Willis Towers Watson, says the insurance industry will play a crucial role in helping governments guard against future pandemic risks and losses.

“If we look at the losses from Covid, it is almost beyond comprehension, and certainly beyond the ability of the insurance market to fund,” McGhie says. “It’s not a risk that can be transferred to the industry in its entirety. It’s just not possible.”

McGhie added that governments would need to take the lead, adding governments would ”need support from the industry in terms of the expertise required to analyse and evaluate exposures, and to put in place structures, which may be parametric in form, and may allow access to the private sector funding that is available and can be structured.”