Insurance Times explores pandemic insurance availability and coverage prior to the coronavirus pandemic, and how this is geared to change in a post-Covid-19 world

As a result of the Covid-19 outbreak, certain insurance lines have taken centre stage as business owners grapple to discover which of their myriad policies could potentially pay out to mitigate the detrimental financial effects of the pandemic and lockdown.

Business interruption (BI) insurance, for example, has gained notoriety – especially as the FCA’s test case gains momentum. One cover, however, that flew primarily under the radar prior to the coronavirus outbreak, but is now garnering increasing interest, is pandemic insurance.

This type of cover hit headlines in April when it was revealed that The All England Lawn Tennis Club had purchased pandemic insurance for the Wimbledon championships. Paying around £1.5m for the last 17 years, the event received an £114m pay out from its pandemic policy when the annual summer tournament was cancelled this year.

But, prior to the coronavirus outbreak, what was the landscape for and perception of pandemic insurance?

According to Neil Frankland, partner at Mills and Reeve, “few pandemic related products existed immediately prior to the Covid-19 outbreak and even where they did – for example PathogenRX promoted by Marsh and Munich Re – the take up for them was very low and generally only by very large and international businesses”.

Julia Graham, deputy chief executive and technical director at risk management association Airmic added: “Prior to the pandemic, cover for disease was available to those that recognised the need – albeit with some very different cover wordings and buy-back exclusions.

“Many had the risk of a pandemic in their risk registers, but I suspect few really examined the wordings as an event seemed a distant reality – typical for a high impact but low probability risks.”

Despite this, Graham continued that Wimbledon’s pandemic cover purchase is wholly expected.

“Wimbledon is a very focused event; the summer competition has been running for many years and is their primary source of revenue,” she said. “I would expect any business so reliant on specific external factors like disease to have a thorough and focused process of risk assessment and bespoke and sophisticated insurance cover.”

As with BI policy wordings, pandemic insurance wordings are also not clear cut, with no real standardisation.

Graham continued: “I don’t think there’s such a thing as a typical wording; in some cases, even the same insurers had more than one wording depending on the nature of where the cover was bound.

“It is quite common for cover to be given and then be excluded with the option of buy-backs. Exclusions vary in detail and intent – some [are] vague and others [are] highly specific, naming diseases or strains of disease excluded.”

Education challenge

One of the key reasons why pandemic and epidemic insurance had low penetration prior to Covid-19 is due to a lack of understanding and education around pandemic risks and the available associated insurance, explained Dr Gunther Kraut, head of epidemic risk solutions at Munich Re.

He said: “Epidemic insurance is not a commodity product. It’s very complex to calculate and requires a lot more market education than well-established insurance products.

“The challenge of developing this market, aside from managing accumulation risk, has been the education process required by the potential insured party. Prior to Covid-19, the risk exposure to individual companies was underestimated.”

This underestimation of risk is why many businesses had qualms around the perceived high cost of pandemic insurance.

Kraut continued: “Pricing needs to be risk adequate, [and reflect] both expected loss and accumulation risk management effort. The concrete premium depends highly on the precise risk insured and the covered area.

“It may be that before the occurrence of Covid-19, many institutions considered their epidemic risk exposure lower than what our historical event data base and pricing base indicated, which implicitly would create the impression of an expensive product. The general risk perception may have changed now.”

Graham agreed: “It’s not an easy cover or risk management expense to sell to an organisation.

“Boards are typically more comfortable and focused on the immediate and what is in front of them. When funds are tight, releasing money to pay for something that seems so remote is a challenge.

“The UK 2018 FRC Code of Corporate Governance requires organisations to examine the process for managing ‘emerging risks’ – which a pandemic is – but the detail of guidance is loose and needs tightening up.”

Increased demand

Undoubtedly, the coronavirus crisis has flagged the necessity for some form of pandemic insurance moving forward.

Martin Sarjeant, head of risk solutions management and strategy, insurance at FIS, said that “pandemic cover is likely to become more mainstream” post-Covid-19.

He continued: “Extending their terms and conditions is something that insurers probably will do differently because up until this pandemic, I don’t think there was a demand for pandemic insurance and I don’t think there was the value in it.

“Even though pandemic insurance existed, I don’t think there was demand because it was perceived to be expensive. You’ve got businesses and policyholders who will value that [post-coronavirus] and will pay for pandemic insurance in the future, so I do think the insurance industry will respond. Everyone’s going to want coverage, especially on the business interruption side.”

Kraut agreed: “The demand for our non-life [epidemic risk solutions] products was muted prior to Covid-19. This has significantly changed during the current outbreak. As this is a relatively nascent market, it’s too early to speculate on the future potential size, but Munich Re believes this to be a scalable opportunity.”

Another option, however, is parametric insurance – this pays out a set amount on the occurrence of a defined event, such as a pandemic. Sarjeant said there will be an uptick in these types of policies as they are easier and cheaper for insurers to offer, in part because they typically do not cover the full loss.

“We’re seeing parametric insurance being a partial solution to pandemic insurance in the future,” he said. “I think the full solution would be some kind of state and insurance partnership.”

Which industries would have had pandemic insurance prior to Covid-19?

According to Dr Gunther Kraut, head of epidemic risk solutions at Munich Re, the key industries that would have investigated and purchased pandemic insurance prior to the coronavirus outbreak include hospitality and tourism, manufacturing, retailing, mining, construction and infrastructure projects and healthcare.

Julia Graham, Airmic’s deputy chief executive and technical director added that “any business reliant on complex supply chains, footfall and the immediate proximity of people – notably indoors or other confined spaces – were especially vulnerable” to pandemic risks.

Is Pandemic Re the answer to pandemic insurance?

For Martin Sarjeant, head of risk solutions management and strategy, insurance at FIS, an industry and government partnership scheme, modelled on Pool Re and Flood Re, “is the only answer” to pandemic insurance moving forward.

“I can see for the next 10 years, pandemics being top of everyone’s minds. It makes sense for every insurance contract to contribute into a centralised pool and there will be government funding to cover these losses as well.

“We do need to have something like a Pandemic Re that is set up in the case of another pandemic like this.”

However, Graham warned that although it is important to address pandemic risks, this should not be “to the exclusion of the next high impact, low probability risk that the insurance market as it exists today, is at least in part, unable to cope with”.

Is pandemic insurance effective?

If pandemic insurance is sub-limited, Charles Manchester, chief executive at Manchester Underwriting Management, does not believe pandemic cover is that useful.

He said: “It’s not practically available at a meaningful level because if you’re a business and it’s sub-limited at £50,000, if you’re a meaningful sized business, £50,000 is going to be a drop in the ocean.”