Rating agency AM Best has become the latest industry body to voice support for tackling future pandemic risk through public-private partnership.
In a new report, analysts noted that insurers are likely to face significant reserve uncertainty arising from the current accident year due to the challenge of estimating COVID-19 losses.
Social inflation, combined with lawsuits addressing liability policies, will drive defense containment costs significantly higher, it added, and court decisions will create further challenges for reserve estimates.
On top of this, a number of legislative and policy measures are being contemplated that would nullify business interruption coverage exclusions in commercial property policies and force insurers to compensate policyholders for risks that were excluded during underwriting.
AM Best believes any public-private partnership adopted to fill this protection gap should take into account the capital supporting all risks insurers bear, which is critical due to the uncertainty inherent in taking on those risks.
“Pandemic risk does not afford insurance companies any geographic diversification due to its global nature,” said Stefan Holzberger, AM Best Chief Rating Officer.
“Diversification by line of business also is not possible, as the current pandemic has demonstrated via the number of lines affected. Insurers may be able to offer limited protection against pandemic risks; however, these limits would be insufficient for a full recovery,” he continued.
“Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses.”
AM Best further noted that the upcoming US election is sure to create delays and proposal resets to any backstop proposal, such as the Pandemic Risk Insurance Act or Pandemic Re.