31 July 2020

CRE: Ferma welcomes Eiopa’s ideas on pan-European pandemic insurance solution

Ferma and other buyer representatives have welcomed a new paper from the European Insurance and Occupational Pensions Authority (Eiopa) that puts forward a potential pan-European pandemic insurance solution with EU funding at the very top.

Ferma and other buyer representatives have welcomed a new paper from the European Insurance and Occupational Pensions Authority (Eiopa) that puts forward a potential pan-European pandemic insurance solution with EU funding at the very top. Eiopa adds that such a scheme could be adapted to cover other systemic risks.

Ferma has also stressed that organisations of all sizes, including large ones that make up much of its membership , must be able to access any solution.

Eiopa’s issues paper on shared resilience solutions for pandemics states that private insurance solutions alone will not be enough to protect society and business against the financial consequences of future pandemics. It notes, for instance, that current business interruption (BI) premiums in some markets would need to be collected for more than 100 years to cover two months of Covid-19-related BI costs.

Any solution will therefore require public-private partnership and need to build on four key elements, adds Eiopa. These are: proper risk assessment, risk prevention and adaptation measures, appropriate product design, and risk transfer.

The paper is based on the European insurance regulator’s discussions with representatives from across the risk management and transfer spectrum, including Ferma, Marsh & McLennan, Insurance Europe, Bipar, AMICE and the Reinsurance Advisory Board.

It does not aim to set out a specific course of action, but highlights options that could be explored at national and European level, with comments invited until 25 September.

The options put forward in the paper include different insurance models and coverage. For example, whether insurance should be mandatory and whether payouts should be based on a pre-agreed parameter or index. The options also include different ways the public and private sectors could work together, for example establishing an EU expert group for data sharing and risk modelling, and creating a platform for public and private coordination on prevention measures. Different potential roles are considered for how the European Union can contribute towards solutions.

When it comes to risk transfer, the paper suggests four layers of cover. The first layer is via insurance or an insurance pool. The second layer would be in the form of reinsurance, alternative risk transfer or a reinsurance pool. The third layer comes via national government support in excess of private market participation. The final layer would be an “overarching” EU support mechanism in excess of national support.

“A layer including an EU-wide intervention could be justified by the pan-European nature of the pandemic crisis. The type of involvement could range from encouraging or promoting risk prevention and incentivising and coordinating national measures, to providing financial support for the recovery from the pandemic, through a funding-type mechanism or based on a reinsurance-type mechanism,” states Eiopa.

Adding: “A mechanism by which the EU would act as reinsurer above a certain threshold of accumulated losses at national level, in return for a percentage of premiums collected by (re)insurers and funded by member state guarantees, could provide a solution, which builds on the steps taken in the first and second layer to increase insurance capacity. The solution would require insurance-based risk assessment and modelling tools, in turn incentivising the role of risk-based solutions. Objective triggers for involving this fourth line of defence could be – a fixed percentage of GDP, to be covered by an EU guarantee sourced from EU member states’ committed guarantees.”

Eiopa’s paper adds that a choice needs to be made between the type of funding for pandemic risk transfer solutions.

 “Public subsidy may pose a risk of moral hazard, by reducing incentives for risk assessment and risk prevention and development of private market solutions. By reflecting risks in the cost of (re)insurance, (re)insurance-based solutions can counter this moral hazard. Public reinsurance solutions may be less costly, but also depend on the willingness of the private insurance market to insure in the first place. In return, the capacity and willingness of (re)insurers to take on part of the risk may depend on the extent of public intervention,” the paper states.

 “By involving all layers of risk owners, the risk of moral hazard – assuming that the next level will cover the risk – can be reduced (‘skin in the game’). The appropriate level of risk retention at each level of the transfer mechanism therefore needs to be clear, as well as the trigger for involving the next layer of risk transfer. Some retention of risk by businesses, for example by limiting sum insured and applying an adequate waiting period, may also help to prevent moral hazard and create the right incentives for risk prevention,” it adds.

 “A risk transfer mechanism is not necessarily static: private risk appetite may start off at a limited level requiring considerable public participation; as risk assessment and reinsurance capacity from the private sector improve over time, public intervention may decrease over time. Through public-private co-insurance, governments can also take part of the risk, from the moment losses arise, for a given percentage. This may improve alignment of interest between public and private actors,” the paper continues.

Eiopa also goes a step further and says the scope of any shared resilience framework for pandemics could be expanded to cover other systemic risks such as cyber, climate change impacts on natural catastrophes and terrorism.

Gabriel Bernardino, chairman of Eiopa, commented: “While it is clear that insurance cannot cover the full costs of pandemics, insurers and reinsurers should be part of the solution and not part of the problem. Furthermore, I strongly believe that shared resilience solutions can play an important role in mitigating economic fragmentation throughout the European Union and should be part of the recovery efforts towards a European Union that protects its businesses and its citizens. We invite views on the options raised in the paper.”

It is no surprise that Ferma has backed the paper. Some of its suggestions very closely mirror the federation’s proposed Resilience Framework for Catastrophic Risks (RFCR).

The RFCR aims to tackle the fact there is currently little or no insurance coverage available for non-damage business interruption (NDBI) losses resulting from catastrophic risks in Europe. It would therefore cover all catastrophic, systemic NDBI risks, including pandemics, a massive cyberattack or climate change threats.

Almost identical to ideas put forward in Eiopa’s paper, the RFCR would function at four levels to offer pan-European protection. Ferma president Dirk Wegener explained to CRE that the framework’s funding could operate as follows:

First layer – risk management/loss prevention and insurance premiums paid by insured companies

Second layer – private (re)insurance markets, possibly including alternative risk transfer mechanisms

Third layer – national member-state pool guarantees where available

Top layer – European Union protection funded largely by public resources, with some premium ceded from (re)insurers.

Ferma CEO Typhaine Beaupérin told Commercial Risk Europe that the federation welcomes the paper from Eiopa. “We believe that a mixed public-private insurance-based solution, based on a sound foundation of risk management, will increase the resilience of the European internal market to pandemics. It should be part of the recovery efforts of the EU and we call on the European institutions to consider this solution in their discussions,” she said.

 “We are convinced that only such a partnership can ensure that there are appropriate incentives for companies to apply modern risk management/loss prevention tools. This, in turn, will support economic sustainability,” she added.

Ferma said that Eiopa’s principal aim is to address the “near total absence of risk transfer for non-damage business interruption losses for systemic risks”.

It said that for such a scheme to work, the EU must be involved.

 “It needs to coordinate and insure minimum standards of national schemes across member states. The EU should also establish an expert group for the necessary data sharing and risk modelling, as Eiopa suggests. Ultimately, a European financial backstop is likely to be necessary,” said Ferma.

It also want the EU to promote risk management at company and national level. “Only by doing this, will we strengthen our resilience to catastrophic risks,” it said.

Ms Beaupérin also made clear that Ferma wants companies of all sizes to be able to access any pandemic insurance pool. Currently, a lot of Eiopa’s thinking seems aimed at SMEs.

 “We believe that we need a solution for the whole business community. A multi-layer scheme with strong risk management and insurance participation would benefit all businesses, from SMEs facing immediate liquidity issues to the largest transnational corporations concerned with supply chain disruptions or other disturbances. The insurance mechanism would allow the scheme to adjust the level of support according to the degree of impact on each company,” she told CRE.

David Priebe, chairman of Guy Carpenter, said Marsh & McLennan commends Eiopa for initiating discussions at EU-level on public-private partnerships to address pandemic risks.

“As a member of Eiopa’s Shared Resilience Solutions Exploratory Group, we have heavily contributed to and are fully supportive of the issues paper. This paper is a step in the right direction to ensure conversations across the EU are coordinated and bring together all stakeholders,” he said.

“Moreover, discussions around public-private solutions to cover pandemic risk are taking place around the world, including in a number of member states, and the issues paper is a useful roadmap for policymakers navigating the complexities of setting up these types of solutions,” Mr Priebe added.

Late last week, Ferma and German and Spanish national risk management associations told Commercial Risk Europe they would support a pan-European pandemic insurance solution announced by Italian insurer Generali, which it is developing with the European Chambers of Commerce and Industry.

CRE