Governments and insurers ‘must work together’ to close the protection gap, says insurance think tank

Business interruption risk is uninsurable by insurers alone, making government involvement essential to enhance both resilience and preparedness around future pandemic shocks, according to research by international insurance think tank the Geneva Association. 

Considering the potential of future pandemics, the think tank has released its Public-Private Solutions to Pandemic Risk report seriesto support government-insurer decisions on how to close the protection gap for business interruption risk.

The series of reports outlines four possible pandemic risk funding schemes where governments can play a leading role, including direct insurance, reinsurance, social insurance and post-event protection.

The first report in the series, An Investigation into the Insurability of Pandemic Risk, revealed that the global property and casualty (P&C) insurance industry collects $1.6tn in annual premiums - with an estimated $30bn for BI policies - compared to projected global output losses of more than $4tn during 2020.

Although at risk capital makes it reportedly impossible for private insurers to offer meaningful pandemic BI coverage, they can instead make important non-risk bearing contributions that leverage their expertise in risk assessment, risk mitigation and claims management, said the report.

Closing the protection gap

Jad Ariss, the Geneva Association’s managing director, said: “It is a tragedy that businesses, particularly SMEs, have suffered so much financial loss during the pandemic as a result of the lockdowns, which were beyond their control.

“The public sector had to step in with multitrillion dollar emergency relief measures. Governments and insurers must work together on how to close the massive protection gap exposed by Covid-19, with governments as the leading players.”

Kai-Uwe Schanz, the Geneva Association’s head of research and foresight, and the lead author of the report, added: “We want to emphasise that of the four pandemic risk insurance schemes outlined, distributing cash post-event – as many governments did for Covid-19 – is likely [to be the] least effective.

“For the other schemes, deciding whether participation is mandatory or voluntary, as well as the role of insurers in pricing and offering coverage, are critical considerations.

”We hope this report effectively guides governments and insurers in finalising their partnership terms.”

  • Direct insurance: The public sector provides voluntary or mandatory insurance to businesses exposed to pandemic risk.

  • Reinsurance: Governments provide reinsurance coverage to insurers that kicks in above a certain threshold and up to a certain limit.

  • Social insurance: Modest public sector coverage with mandatory participation through pre-event payments, for example a tax or levy.

  • Post-event protection: An ad hoc safety net offered by governments to those affected.

The report also assessed the benefits of each scheme against seven public policy goals. These are:

  • Maximum coverage.
  • Limited public exposure.
  • Matching funds with needs.
  • Risk mitigation incentives.
  • Cost efficiency of risk transfer.
  • Operational efficiency.
  • Macroeconomic benefits.

The Geneva Association is dedicated to identifying and investigating key trends and risk areas that are likely to shape or impact the insurance industry, as well as developing corresponding recommendations for the industry and policymakers.