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Insurers wrestle with pandemic problem: How to pay the bill
by editor June 24, 2020
Europe's insurers are trying to solve a complex math problem set by politicians during the coronavirus outbreak.
The industry is under pressure from governments in Europe and elsewhere to develop "pandemic insurance" to help businesses cope with events like the coronavirus lockdowns.
French government leaders, for instance, in April called on insurers to be "more generous" and come up with a plan for future coverage. In the United Kingdom, too, the industry faced a backlash over the amount of support available to shuttered businesses.
But the costs of such events outstrip what insurance companies can pay. Even with typical business policies excluding global disease events, the Lloyds of London market has estimated its coronavirus payouts are "likely to be far in excess of … historical events" such as the terrorist attacks of September 11, 2001.
In response, insurers in several countries around Europe are drawing up ways to bring in public money as a supplement to private industry, so they cover small companies, not just the big firms that can take out such policies now. But that will require buy-in from political leaders.
"Our work is a contribution to this debate which is now political [rather] than technical" — Stéphane Pénet, deputy chief executive of the French Insurance Federation (FFA)
"There is a large debate here in France in how we could protect corporates against this situation in the future," Stéphane Pénet, deputy chief executive of the French Insurance Federation (FFA), told POLITICO.
"And so, our work is a contribution to this debate which is now political [rather] than technical."
The issue has been on the agenda since March, when the coronavirus spread across Europe and forced closures of companies — which then found out that their standard business-interruption insurance policies did not include cover for a pandemic.
Insurers argue they cannot be on the hook for a crisis that hits everyone at the same time. The business is built on the premise that a large pool of customers pay premiums but only a small number make claims at any one time.
Égalité and fraternité
It's not an easy problem to solve. The FFA pitched its proposal to government last week for a pool where insurers and reinsurers cover up to €2 billion of claims. After that, the state would step in.
"The traditional insurance and reinsurance private market would not be able to cover this … without partnership with the government," Pénet said.
To seed the fund, small- and medium-sized businesses with fewer than 250 employees would pay a mandatory charge on top of existing fire or business-protection policies.
If forced to shut down in a future pandemic, each company would get a lump sum based on its sector and revenue. An average restaurant, for example, with annual turnover of €500,000 would receive a sum of €7,000 to €8,000 for a three-month closure. Meanwhile, worker wages would be supported separately by other public programs.
Pénet said his association estimates that if the scheme had been in place during the current crisis, there could have been up to €10 billion worth of claims — surpassing the sector's capacity.
Still, one incident is not enough for insurers to put a price on pandemics. Industry actuaries need a wealth of data on losses from past events in order to calculate the risks. With few historical comparisons, they'll have to rely on the state to cover an unpredictable future.
Businesses will likely still be on their own if a second wave of coronavirus infections hits this fall | Philippe Lopez/AFP via Getty Images
For that, the FFA is now waiting for the government to estimate its cost of state protection — a charge that exists for other insurance pools covering the likes of terrorist attacks. The industry could then estimate a price for customers.
In any event, businesses will likely still be on their own if a second wave hits this fall. There won't be anything in place that quickly.
The French government has said it will decide by year-end on a preferred solution for small companies. Pénet said the insurance option, dubbed "Catex," would then take six to nine months to get up and running.
German CATs
The design of the French scheme draws on government-backed pools that exist for other seismic events like terror attacks or floods that hit a broad swathe of people at the same time.
But it is not the only way of going about it, as insurers or authorities in the U.K., Italy and Switzerland also seek solutions.
In Germany, insurers suggest an additional layer of private money could be tapped via the capital markets through so-called catastrophe bonds.
With a "CAT bond," investors put up capital and receive interest payments for a set period, then get their money — unless a prescribed catastrophe occurs, like a hurricane. In that event, the capital goes to the insurer so it can pay out claims. The instruments have been in use since the 1990s.
The German Insurance Association (GDV) proposes to make use of CAT bonds in two options: either a mandatory scheme like the French model, or a voluntary version where companies' contributions are based on their desired payout.
Jörg Asmussen, managing director of the GDV, said those schemes could take five to 10 years to build and reach enough capital, roughly in the double-digit billions.
"We were thinking about the future, not dealing with the current crisis," he said in an interview.
Asmussen, a former European Central Bank Executive Board member and deputy finance minister for Germany, said national initiatives should be the first focus, before turning to any European element.
"It's a model that is for the beginning, confined to a member state of the EU because this is just it is simpler, and you can do this quicker," he said.
He added: "In a second step one could somehow link or combine these national models."
The German economist said that while national schemes differ on the details, the fundamentals are similar.
"You always have a public-private partnership, you have different layers, there is a focus on SMEs, there is at least a tendency, if not a decision for a mandatory system," Asmussen said.
Europe second
EU regulators aren't waiting for a first step, though, before thinking about a shared backstop.
The European Insurance and Occupational Pensions Authority (EIOPA) is brainstorming "shared resilience solutions."
Gabriel Bernardino, chairman of EIOPA, told a webinar hosted by the Bruegel think tank this month that he believed the best solution for public funds includes pooling risks at a European level as a "last layer."
But beware disparities among the countries, warned Frédéric de Courtois, Generali general manager and leader of a working group on pandemic insurance at the association Insurance Europe. Speaking at the same event, he said differences could arise if initiatives are brought forward only where governmental pressure is the greatest.
"The political question is, if we only build national schemes a lot of European citizens will stay uncovered. Can we accept this politically as Europe?" — Frédéric de Courtois, Generali general manager
"The political question is, if we only build national schemes a lot of European citizens will stay uncovered. Can we accept this politically as Europe?" he asked.
De Courtois added, "My big worry is that we will have half of Europe covered and half of Europe uncovered and we will discover this the next time we have a pandemic."
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