While it is clear that the enormous risks posed by future pandemics can only be tackled through public-private partnerships, the solutions proposed so far fail to fully contend with the scope and complexity of a global systemic threat of this nature.
This is where parametric triggers come in, says Third Point Re’s Tracey Gibbons, who argues that this could be the approach needed to make government backstop schemes viable.
Speaking in a recent interview with Reinsurance News, Gibbons discussed the re/insurance industry’s response to the pandemic so far and its options going forward.
Gibbons, who is Senior Vice President for Specialty Reinsurance at Third Point Re, noted that, even months after the outbreak of COVID-19, much of the market is still acting “like a deer caught in the headlights.”
“Companies are struggling to grasp the true nature of the exposures that they’re looking at because they’re getting hit from multiple angles,” Gibbons said.
Event cancellation lines have been hit the hardest so far, but business interruption has again reared up as a major issue following the FCA’s landmark test case in the UK, and knock-on effects are also being felt in lines such as Credit, Mortgage, Political Violence and US Workers’ Compensation.
In what could be seen as a knee-jerk reaction to this situation, a slew of exclusionary language was introduced into contracts at the mid-year renewals.
But with most of these exclusions applying specifically to pandemic risk, Gibbons notes that many insurers could be in for a nasty surprise when COVID-19 is eventually downgraded to an epidemic.
“The point at which COVID ceases to become a pandemic, all those people who are relying on the pandemic exclusion will be writing active COVID,” she told Reinsurance News.
“I’m not entirely convinced that the companies accepting those pandemic exclusions actually realize that they could potentially be writing active COVID in six months’ time.”
With the threat of future COVID losses still looming large, the industry has been quick to lend its support to proposals for some kind of public-private partnership to confront pandemic risk, such as the Pandemic Risk Insurance Act (PRIA) in the US, or Pandemic Re in the UK.
The need for such a collaboration is evident from the statistics, which show that business interruption losses in the US alone have amounted to more than $1 trillion per month since the start of the pandemic. This compares with the total capital of the US P&C marketplace, which stands at around $800 billion.
“You can see the math doesn’t add up,” Gibbons said. “There’s no way that the insurance community can provide that kind of coverage. And part of the problem is that every government scheme we’ve seen so far has had a cap on it.”
But part of the problem with a state-backed solution is that, while governments will supply the much-needed capacity, re/insurers will likely be responsible for issuing policies and handling claims.
With 31 million small business in the US, it would not take a particularly extreme scenario to completely overwhelm the administrative capacity of the re/insurance industry in a subsequent lockdown.
“As a result of that, the easiest thing to do might be to introduce some sort of parametric trigger which would include a simple proof of loss,” Gibbons suggested.
“You would have a situation where certain conditions are met, and then because you’ve ticked the boxes the policy would pay out. I think that’s the ideal solution.”
Not only would a parametric approach greatly alleviate the administrative burden of pandemic scheme, it could also help to clear up the issue of pandemic designation if the scheme were expanded to include other systemic risks, Gibbons argued.
“There has to be some kind of government backstop because the industry does not have a large enough capital base to write the risk. But arguably it should respond to all communicable disease and maybe even go a little further and be available to cover any systemic risk that is not covered in the regular market,” she told Reinsurance News.
“So, it wouldn’t just respond to communicable disease but also to other kinds of weird and wonderful events that either haven’t been considered or where the potential for catastrophic loss are too large for the market to cover.”
Gibbons went on: “If we accept that a government backstop should not necessarily just respond to pandemic, or even if we restrict it to pandemic only, we still have the issue of how to handle claims. This is where parametric triggers could offer a way out.”
“An example of this would be a World Health Organization declaration of a global health emergency, a government lockdown that prevents your business from being able to open and a loss arising out of the combination of these two things. You have several triggers and if those things happen, you will get a payment.”
According to Gibbons, the current market dynamic surrounding the pandemic leaves Third Point Re in an interesting position, with huge demand for coverage but little competition among sellers, and ongoing uncertainty about what form protection should take.
“We recognize that we can’t be all things to all people,” Gibbons remarked. “As a reinsurer we can’t come up with a solution for the economic costs of business interruption, that’s got to be government led. But we do think there is a need for specialized, nice products and our expertise will allow us to customize and craft economic solutions within those niches.”
“At TPRe we’re taking a step back and assessing the situation,” she added. “There’s no shortage of demand for the products and we are not going to make a snap decision about what we’re going to do for fear that somebody else will snap up all the business, but we will look closely at the real and ongoing needs of the various elements of the market and work on offering bespoke solutions to address their concerns.”
But looking ahead, Gibbons feels that demand and supply will eventually start to match up at the right price if the industry lives up to its reputation for having a short memory.
“Over the next few years there could be a combination of carriers broadening their appetite and buyers starting to think that something like COVID-19 won’t ever happen again in their lifetime,” she said.
“And then if you’ve got carriers more willing to write coverage, and buyers less likely to buy it will lead to the market finding its equilibrium again.”
