As widely reported, the dramatic outbreak of COVID-19 caused disruption on a scale not seen in more than a century. Despite unprecedented state-backed support, the crisis has raised questions around the limitations of the state as the protector of businesses and the wider economy.
The economic impacts of COVID-19 will take years to recover from. The level of debt incurred by governments for the pandemic alone, estimated at around $17 trillion among OECD nations1, will have consequences for national balance sheets for decades. The UK’s spending on pandemic support and stimulus has already topped £190 billion.2 Simultaneously, the country faces a 10% contraction to GDP in 20203 and a steep fall in tax revenue, a level of support no government can sustain in the long term. Moreover, the UK will find it challenging to continue extensive financial support measures with the threat of a second wave, particularly while the economy is in a downturn. Businesses need to realise the importance of their own mitigation and response measures to better deal with future pandemic-related events.
“You can’t wish away systemic risks and it’s much cheaper to deal with them upfront and mitigate them” Mark Carney, Former Governor of the Bank of England
The global economy is confronted by the consequences not just of the COVID-19 pandemic, but also of high-impact ‘systemic’ issues – risks that have broad geographic impacts and that disrupt established ways of operating – such as climate change, cyber-attacks, geo-political risk, and terrorism.
The COVID-19 crisis has demonstrated that a purely reactive strategy is expensive and ineffective in mitigating the consequences of systemic risks. Organizations should leverage this as an opportunity to develop and integrate long-term strategies, such as business continuity management augmented with enterprise risk studies to drive longer term economic and operational resiliency. As the Chair of the UK Commons Public Accounts Committee, Meg Hillier, recently highlighted, “pandemic planning is the bread and butter of government risk planning, but we learn it was treated solely as a health issue, with no planning for economic impacts”. Lessons must be learnt from the pandemic and the extent to which governments and businesses were prepared for this disaster.
Disaster preparedness and response is not the responsibility solely of government. The re-insurance industry, as a forecaster and protector against risks, has a critical role to play in building new protection mechanisms into the economic recovery so that the country is better prepared for future systemic challenges.
The re/insurance industry possesses an extremely sophisticated understanding of risk that must not be underestimated or overlooked. Through the use and analysis of data, the sector can develop effective contingency plans for clients. These tools can help create ways of incentivising and embedding resilience into our way of life. For example, in Thailand, flood catastrophe models help to improve understanding and build resilience. The models use insights and data from the devastating flood of 2011 and apply these to the modern day, via simulation techniques and real-world interventions like flood defences, enabling more detailed insights on loss estimates and enhanced planning. Intelligent and extensive use of the data can help protect consumers in the future by developing policies that address gaps in coverage and respond to the changing risks.
But insurers alone cannot cover total losses for events like COVID-19. The industry simply does not have the financial resources to accept this scale of risk on its collective balance sheet. To do so would render many policies unaffordable, closing protection off to all but a well-resourced few.
Total UK commercial insurance premiums are c.£22.5 billion per annum4, compared to direct government support costs of close to £200 billion5, not including knock-on costs likely to be in the hundreds of billions in the form of lost economic activity. Globally, government debt in response to COVID-19 alone is expected to reach $17 trillion in OECD nations6, yet total global reinsurer capital available is $610billion.7
A public-private collaboration is required to find solutions. This is not a new concept. In the aftermath of 9/11, public-private risk pooling models were established in the US and Australia. ‘Pool Re’ was formed in the UK after an IRA bombing in 1992. Pool Re is a mutual that provides its members, who pay it annual premiums, with a guarantee that allows them to provide cover for losses resulting from acts of terrorism, regardless of the scale of the claims. It is owned by its members but is underwritten by a UK Government backstop support mechanism if there were ever insufficient funds to pay a claim. This sharing of risk, with clearly defined triggers and quantifiable loss, enabled the creation of a viable commercial insurance market for terrorism events, provided much-needed assurances to lenders and helped stabilise the overall economy.
There is potential for a similar risk pooling model to be developed for other catastrophic events like pandemics. The solution would rely on the risk being shared between policyholders, insurers and governments. The key to its success is the level of consumer participation, which could be made voluntary, indirectly compulsory or legally mandated. The model will need to be tailored to the unique risk profiles and risk tolerance of the economy, with the right economic incentives in place for all policyholders to enact measures of mitigation. As the litigation around coverage for business interruption has demonstrated, when looking to provide insurance coverage for events that involve systemic losses, the risk and triggers need to be clearly defined. In the case of a pandemic where the loss is so wide-ranging, it requires innovative approaches to clarify and narrow the coverage to where insurance can most meaningfully address the most important aspects of the risk.
An industry-designed solution that government can work with is an attractive proposal for any finance ministry. Discussions are starting to take place - in the UK led by Lloyd’s and a new industry-led ‘Pandemic Re’ Group - but greater urgency is needed. Whilst industry does the ‘heavy-lifting’ around potential protection models and mechanisms, government needs to take steps to build economic resilience planning into its processes.
Politics is often geared towards short-termism. Thoughtful, long-term resilience planning needs to be implanted as a principle across the different levels of government. A series of relatively easy ‘quick-wins’ could help jump-start activity in this area. Establishing a government and industry advisory panel on economic resilience and protection and/or an independent review to look at resilience in the economy would help kick off necessary discussions. A defined ministerial responsibility for economic resilience, covering contingency and protection measures, could also serve to bring a sharper focus to the issue.
The COVID-19 pandemic has served as a harsh reminder that, despite rising prosperity and technological advancement, catastrophic events still have the capacity to bring major economies to their knees. Governments and industry cannot risk the same mistake of waiting to play catch-up in a future pandemic situation. The insurance sector faces significant reputational and regulatory risks if it is not seen to be adequately fulfilling its duty in protecting business and consumers. There is a unique opportunity, as well as an urgent need, to learn the lessons and work together in the future.
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