Munich Re has argued that pandemic risks are “not insurable by the private sector alone” and has endorsed the use of state-backed risk pools to mitigate their impact.
The reinsurer notes that the coronavirus pandemic has highlighted how vulnerable the world still is to very large risks, and says that more prevention measures and risk transfer instruments are needed to make societies more resilient.
This is partly due the fact that the systemic nature of very large losses has increased as a result of globalization and digitalization.
For example, from 1990 to 2008, world trade grew twice as strongly as the overall economy, and since then, trade has still increased more rapidly than economic output.
“The coronavirus pandemic needs to be a lesson to us all: We must take action more rapidly and vigorously to ensure that we are not as unprepared as we were with COVID-19 for risks such as cyber attacks or climate change,” said Torsten Jeworrek, Member of the Board of Management at Munich Re.
“It is possible to better safeguard against the financial consequences of such risks for the benefit of humanity,” he added.
“It needs to be clear that systemic risks like pandemics also require systemic countermeasures – for instance, the creation of state-backed risk pools to make uninsurable risks bearable.”
The expenditure that insurers have incurred for COVID-19 losses is significant and the burden is already nearing that of the most costly natural catastrophes.
Life and health insurance covers pandemic risks, and the cancellation of numerous major events has also caused significant losses. Liability and travel insurance as well as credit business have sustained claims.
Yet the greatest economic losses by far have been caused by business interruptions owing to imposed lockdowns.
Given that these losses occurred almost simultaneously across many sectors of the economy, Munich Re stresses that the private insurance sector is simply not large enough to cover the risk.
For instance, the American Property Casualty Insurance Association (APCIA) estimates that US insurers’ risk capital would have been fully consumed within a matter of weeks if business interruption losses owing to the coronavirus had been covered.
“We need new reliable mechanisms to insure such risks,” said Stefan Golling, Chief Underwriter at Munich Re.
“The only way to achieve this is by creating state-backed risk pools in which insurers can participate with limited capacity. Furthermore, insurers can help to assess risks accurately and organise distribution and claims settlement.”
