Lloyd’s calls for industry and government collaboration to mitigate future systemic risks post-Covid19

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It has proposed three open source frameworks to address these challenges

Lloyd’s of London is calling for close collaboration between insurers, brokers, customers, the global industry and government in designing cover for future systemic risks, which it says are complex.

With the pandemic presenting what Lloyd’s refers to as a “humanitarian crisis” and one that the world was unprepared for, it stressed that one sector cannot shoulder all the risk with the impact being “too wide ranging”. Nevertheless, it said that solutions are required.

This is according to Lloyd’s report ‘Supporting global recovery and resilience for customers and economies’ published today.

This collaboration, it hopes, will create new vehicles that combine insurance capital with sovereign capacity for protection against systemic risks.

And to accelerate this, Lloyd’s is proposing solutions that could provide protection for customers’ short, medium and long-term needs, deeming the pandemic as an “opportunity to come together to share risk and create a braver, more resilient world”.

Lloyd’s Chairman Bruce Carnegie-Brown said: “The purpose of insurance is to help businesses and communities manage the risks they face, enable them to recover quickly from disasters by paying claims, and provide the security that allows them to innovate, develop and drive economic growth.

“Covid-19 has demonstrated that there is much more we can do to support our customers by providing protection for the changing risks they face. Some of these risks are of a scale that require partnership with governments globally and this report identifies ways in which the insurance industry could work with governments to share risk and create a braver, more resilient world.”

The report follows Lloyd’s announcing that its underwriting room will reopen in September with new measures in place and previously confirming on 14 May 2020 that the market will pay out in the range of $3bn to $4.3bn to its global customers as a result of the far-reaching impacts of Covid-19.

Open source frameworks

To address these challenges, the report sets out three open source frameworks, two of which require government and insurance industry partnerships – these were developed with its UK and global advisory groups.

These seek to address the short, medium and long-term challenges faced by the customer as they begin to reopen post-lockdown against the threat of a resurgence of Covid-19, as well as building greater resilience across global supply chains and the digital economy, while preparing and protection for the next systemic catastrophic event.

The three frameworks are:

ReStart: A potential non-damage business interruption solution (loss of revenue without a physical damage trigger) for future waves of Covid-19 being developed by the Lloyd’s market, specifically focused on supporting SMEs. The solution is focused on giving certainty of non-damage business interruption coverage initially to UK SMEs by pooling limited capacity across a number of Lloyd’s market participants. The product would support SMEs reopening, offering a range of limits that ensure it is affordable for customers, without requiring any government support.

Recover Re: Sets out a proposed ‘after the event’ insurance product framework, that could provide immediate relief and cover for non-damage business interruption over the long-term, including the current Covid-19 pandemic. If implemented, this could be an efficient way to inject commercial and government funds into the economy, providing relief to customers with limited borrowing capacity. This framework could be implemented in any country where the government has the resources and industry commitment to support it.

Black Swan Re: This is a reinsurance framework for government and industry partnership that could better protect customers from the devastating and long-term impacts of systemic catastrophic events – from another pandemic, or global supply chain disruption, to the interruption of critical infrastructure or utilities. The framework would provide reinsurance for commercial non-damage business interruption cover for black swan events through industry pooled capital, backed by a government guarantee to pay out if ever the pool had insufficient funds.

New policies

Meanwhile, expert entrepreneurs and innovators drawn together by the Lloyd’s market have already started creating new policies to support the immediate health response as well as the longer-term exit strategy.

This includes the search for diagnostics, treatments, and vaccinations, where one Lloyd’s syndicate is insuring more than 100 individual clinical trials taking place around the world investigating all stages of Covid-19.

Lloyd’s is also actively working on an insurance solution to support the safe transportation of a Covid-19 vaccine to emerging markets when it is developed.

Working with insurtechs

Alongside developing and sharing these frameworks, Lloyd’s is also developing a Centre of Excellence supported by up to £15m in seed capital investment.

This centre will build resource and capability to better understand, model and create products that better protect customers against systemic risks, including pandemics.

It will include new technical capabilities and services to support insurers, and academic partnerships to develop a better understanding of systemic risks and customers’ emerging needs from the insurance industry.

To kickstart this, Lloyd’s Innovation Lab is already working with insurtechs that can provide some of these capabilities.

This includes exploring the application of an epidemic tracker to better evaluate and underwrite pandemic risk, as well as solutions to help close the insurance gap for systemic risks.

In addition to this, Lloyd’s Product Innovation Facility is focusing on innovating products to respond to an accelerated shift towards intangible-driven business models in response to Covid-19.