ABSTRACT

Public-Private Solutions to Pandemic Risk: 'Opportunities, Challenges and Trade-Offs'   [open pdf - 0B]

From the Executive Summary: "Commercial insurers have always sought to push the boundaries of insurability by developing innovative and viable approaches to new and emerging risks of major severity such as natural disasters or changes to liability regimes. For example, Alternative Risk Transfer (ART) solutions, introduced in the 1980s, are designed to better reflect individual risk characteristics, mitigate moral hazard (i.e. the risk of people behaving less carefully once covered by insurance), offer (limited) cover for new exposures and expand capacity for large catastrophe risks (e.g. by tapping into the vast pool of institutional investment funds through Insurance-Linked Securities (ILS)). [...] These efforts notwithstanding, pandemic business continuity risk was, in general, never possible nor intended to be covered by the private sector. To some extent, this reflects demand side reasons such as an endemic underestimation of the frequency and severity of pandemics. However, the shortage of supply primarily results from the high level of embedded risk and, therefore, prohibitively high amounts of capital needed to underpin credible insurance commitments. These extraordinarily high capital requirements are attributable to the unique correlation in the frequency and severity of pandemic business interruption losses as revealed by COVID-19 [coronavirus disease 2019]. Looking ahead, this does not rule out the provision of small-scale selected private market coverage by limiting the degree of risk transfer and the number of businesses covered."

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Date:
2021-04
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Copyright:
2021 Geneva Association
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Geneva Association: https://www.genevaassociation.org/
Media Type:
application/pdf
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