The future provision of business interruption insurance is likely to require the use of alternative risk transfer solutions given the lessons learned from Covid-19
The European Union’s regulatory body, the European Insurance and Occupational Pensions Authority (EIOPA), has warned that the ability of the industry to meet the needs of businesses for a range of systemic risks will depend on partnerships between the industry and capital markets.
It has published a paper on measures to improve the insurability of business interruption (BI) in light of pandemics. It examined the available options to prevent and reduce losses, including capital markets risk transfer, and multi-peril solutions for systemic risk.
The authority said prevention remained the priority.
“By promoting prevention measures, insurers can improve society’s capacity to reduce losses,” it explained. “Improving clarity on the scope of coverage as well as integrating prevention measures in risk-based pricing of the insurance cover can contribute to showing the true cost and create incentives for preventive behaviour.
“Prevention can be supported by regulatory incentives, as well as by public-private initiatives for sharing data. Aligning public-private measures for risk prevention can help in reducing moral hazard and improve the insurability of the risk.”
The biggest lesson learned from the coronavirus pandemic has been the size of exposures the market faces in terms of business interruption risks.
EIOPA said it was likely that capital markets will be required to act as an additional layer of risk transfer and diversification, given society’s capacity for bearing business interruption risk will be required to go beyond traditional insurance mechanisms.
“Designing new and successful capital markets instruments for financing business interruption risk in a pandemic crisis poses challenges and requires legal certainty, predictability and swiftness in the payment of claims,” the authority explained. “Progress on pandemic risk modelling and pricing is needed, where possible incentivising risk prevention through relevant claim triggers.”
The paper said there was evidence multi-peril solutions can provide opportunities for addressing the systemic risk of ‘following’ events.
“While pandemic-specific schemes are being discussed today, the option to introduce future-focused multi-peril pools should be considered going forward,” EIOPA added. “This could support the development of common prevention measures, as well as address the opportunity cost of separate peril solutions.”