How to Eat an Elephant – on the insurability of a pandemic
Desmond Tutu once wisely said that “there is only one way to eat an elephant: a bite at a time.” What he meant by this is that everything in life that seems daunting, overwhelming, and even impossible can be accomplished gradually by taking on just a little at a time.
The consequences of the current Covid-19 pandemic are huge and they dwarf most elephants. The number of human tragedies is immense although insurers seem to get along with the consequences in life and death. A different issue is business interruption where most existing policies do not cover the losses. A good question is whether it would be possible to extend business interruption cover in such a way that also situations like this would be covered.
The trigger in business interruption, connected to Covid-19, does not come from virus infections. Instead, the trigger comes from societal lockdowns. From the actuarial point of view there are at least two problems with this trigger.
Firstly, the trigger is not really accidental but rather a political decision. Sharing of risks through actuarial techniques works best when a claim is triggered by something that is independent of the will of the parties involved. Current business interruption losses are really the result of politically imposed societal lockdowns. These are certainly based on the virus but they are not a direct consequence of it. The lockdowns reveal the unpreparedness of societies to the threat and present the last resort when nothing else works.
The second problem is that these lockdowns emerge in different parts of the world in a highly correlated manner. This makes it impossible for even the largest reinsurers to diversify the risk geographically. We still lack intergalactic sharing of risks envisaged in an earlier blog.
The AAE has recently published a note on the insurability and pandemic risk. This note shows that as such financial ex ante preparedness for the losses would be huge. Also it shows that countercyclical macroeconomic tools that have been successfully utilised in the banking sector cannot be extended in any meaningful way to insurance. The conclusion is that in its current form business interruption claims due to societal lockdowns would not be insurable.
But it is not the time to lose all hope for a better future. At some stages large natural catastrophes and terrorism were thought to be uninsurable. There have however been developments in these areas where through public private partnership societies can better manage these risks and actuarial sharing of risks can play an important role.
Business interruption losses due to Covid-19 are huge. But we should not surrender when facing the challenge of coping with a future outbreak. Science can do a better job of understanding the phenomenon and developing vaccines faster. Societies can do a better job to avoid falling into a situation where everything has to be shut down. And actuaries can create tools to share the remaining risks.
Huge risks need to be sliced into manageable parts. With public private partnership there are possibilities in managing the risks of a future pandemic in a better way.
On 30 November 2021 the AAE will organize a Roundtable on the topic “Solvency II Review: Expectations towards Actuaries in a Post-pandemic World”. The thoughts shared in this blog will be part of the discussions during this Roundtable.
If you wish to join, please register here.
More details on the Roundtable can be found on the AAE website.
This blog is written in a personal capacity.
8 November 2021