The scale of economic losses across the globe from the COVID-19 pandemic are the equivalent of the world’s P&C insurers’ BI premiums for the next 150 years, research has found.
Respected think tank The Geneva Association has undertaken research on the insurability of pandemics and while it found the life and health sector can and could withstand such a shock, the non-life market has found itself under extreme pressure.
The report calls for governments and the industry to look at a new partnership that will allow non-life risks to be covered in the event of another pandemic on the scale of the current COVID-19 event.
While it stated that insurers have a significant role to play it added that they cannot do so in isolation and governmental involvement will be key to create a workable solution.
The research report, An Investigation into the Insurability of Pandemic Risk, said encouragingly that health and life risks for a pandemic resembling COVID-19 pose no fundamental insurability challenges.
However, it added P&C insurers have nowhere near the capacity needed to shoulder projected global output losses of more than $4.5 trillion for 2020. By comparison, they collect $1.6 trillion in annual premiums, with just $30 billion for business interruption policies.
Jad Ariss, The Geneva Association’s managing director, said: “When COVID-19 hit, insurers moved quickly to provide relief to their customers – for example, through reduced premiums – safeguard their employees, and engage with governments. They are promptly paying all legitimate claims where pandemic risk is covered. But, as our research shows, the pandemic exposed a massive protection gap in the area of business continuity risk.
“We need to find sustainable solutions which harness the industry’s potential contributions while maintaining its solvency and viability.”
Writing in the report Ariss added: “Encouragingly, pandemics on the scale of COVID-19 pose no fundamental insurability challenges for health and life insurers, allowing them to fully play their protection and support role to affected people and communities.
“The picture is different for property & casualty (P&C) losses. Even those who anticipated the scenario of a global pandemic did not fathom the nature and scale of government decisions taken around the world to slow infections: wide-ranging shutdown measures that brought economies to a standstill. From an insurance perspective, this type of government response is neither predictable nor modellable.
“That is one of the reasons why pandemic risk was not included in most business interruption policies. Our research findings are unambiguous: the property & casualty insurance industry, which collects $1.6 trillion in premiums per year for all policies – and a mere $30 billion for business interruption risk – is not the right vehicle for shouldering the projected global loss in GDP for 2020 of $4.5 trillion.”
“As a consequence, governments need to involve themselves in closing the pandemic protection gap in P&C. And insurers still have a role to play.”
Kai-Uwe Schanz, The Geneva Association’s head of Research & Foresight and the leading author of the report, added: “Insurers are providing meaningful support to people in the areas of health and life during COVID-19. But pandemic-induced business losses defy basic, widely accepted criteria for insurability. Unlike risks like natural catastrophes, they occur on a global scale and are not diversifiable.
“Governments and insurers urgently need to figure out the right partnership modalities to prepare for – and respond to – extreme risks like pandemics. The Geneva Association’s research will support this endeavour.”