25 September 2020

CRE: EC starts work on pan-European pandemic risk transfer solution

Commercial Risk Europe has learned that the EC is setting up a working group to deliver risk transfer solutions for pandemics and other cat risks, which will consider a pan-European private-public pool with EU funding at the very top.

After much discussion, this is the first concrete sign that work is officially underway on the topic.

In a letter seen by CRE, John Berrigan, director-general of the EC’s Directorate General of Financial Stability, Financial Services and Capital Markets Union (DG FISMA), has written to other departments to set up an “inter-service working group to explore solutions to enhance insurance protection against the damages of future pandemics”.

Mr Berrigan has invited the directorate-generals of nine other departments to appoint a representative to the working group he will chair. The European Insurance and Occupational Pensions Authority (Eiopa) will also join the group, which is due to hold its first meeting in the second half of this month.

The letter says the working group will then meet once a month and present a report with possible recommendations for future action by the first quarter of next year.

Mr Berrigan says the EC will consult with member states, their competent authorities and representatives of the private sector on this issue . These consultations will seek to collect information on initiatives already taken at national level and internationally to address the issue of the pandemic insurance gap.

In his letter, Mr Berrigan stresses that the insurance industry has played a “very limited” role in effectively covering business interruption losses caused by Covid-19 lockdowns and other containment measures imposed by national governments. This stems from the fact that pandemics are generally excluded from commercial insurance contracts and has created a “protection gap”, he explains.

Experts, including insurance buyer representatives, agree that such non-damage business interruption (NDBI) risks cannot be covered by the insurance market alone, given the sheer scale of potential losses. And there have been moves at national level in various European countries and the US to create public-private partnerships to cover pandemic risk and other cat events.

Mr Berrigan explains in his letter to other EC department heads that most proposals or ideas put forward refer to “shared resilience solutions”. This is “where the private sector offers a (possibly limited) first layer of protection, complemented by public intervention when claims exceed certain predefined levels (second layer) and possibly by reinsurance mechanisms (third layer)”, he tells the other EC department heads.

 “Discussions related to this type of solution (involving private and public interventions) are progressing more quickly in some member states (eg France) and the topic is receiving widespread interest in society,” he adds.

Mr Berrigan also notes that some have called for a pan-European solution with EU-level support, and this is what the working group will consider. The Federation of European Risk Management Associations (Ferma) backs such a move.

 “In view of the interdependencies of our economies and of the single market for insurance, some experts and stakeholders support coordinated approaches, and promote some form of EU-wide coordination of national initiatives or EU (direct) layer of intervention (fourth layer),” states Mr Berrigan in his letter.

 “In this context, EVP [Valdis] Dombrovskis has asked DG FISMA to engage on these issues and for that purpose set up a ‘cross-DG’ working group to explore suitable policy solutions at EU level,” he adds.

This will include potential “direct” EU involvement “as a possible last-resort layer of intervention”, says Mr Berrigan. “Although such an option will inevitably be constrained by EU budget and feasibility issues,” he notes. .

The inter-service working group will “consider and assess the suitability of possible EU-wide actions, which could range from sharing best practices at EU level to proposing targeted legislation”, the letter continues.

 “Discussions may also cover the possible financing of EU projects of adaptation or prevention to new standards in terms of risk prevention, for both entities and citizens, and the integration of preventative measures into the terms and conditions of insurance contracts,” it adds.

Ferma and other buyer representatives welcomed a paper from Eiopa in July that put forward a potential pan-European pandemic insurance solution, with EU funding as last resort. Eiopa added that such a scheme could be adapted to cover other systemic risks.

So Ferma will no doubt welcome the news that Eiopa will be involved in the EC’s working group.

Eiopa’s 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 didn’t 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.

It is no surprise that Ferma has backed Eiopa’s 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 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.

And it now seems that the EC is strongly considering the implantation of such a scheme with its new working group.

The letter from Mr Berrigan explains the group will assess the following aspects.

The actual need for protection in the form of so-called “non-damage business interruption insurance” and the extent of the “protection gap”

The capacity of the private sector to insure large risks like pandemics, suitable forms of protection and the scope of possible protection schemes – for example, whether to target pandemic risk only or other large scale risks as well

The potential role for national public sectors as a second layer of protection against the consequences of events such as lockdown; it will also consider the involvement of EU finance as a last resort

The specific considerations that should be given to small and medium-sized enterprises and self-employed workers that may have less easy access to insurance and financing solutions in times of crisis

Coordinated prevention measures addressing business continuity and health prevention that could contribute to limiting the economic and welfare consequences of a pandemic.

Finally, Mr Berrigan notes that the group will also consider creating a new structure to pull together data on pandemic risk to facilitate risk transfer.

“Because comprehensive data to measure pandemic risks and their consequences for the real economy may not be publicly available and this aspect creates some evident challenges, there is also a need to consider the creation of some new (centralised) data architectures or institutional channels to exchange data. This aspect is also relevant for insurers and their capacity to develop suitable risk modelling tools that will underlie the development of whatever type of (new) insurance product/coverage to protect businesses against future pandemics,” he says.

 

CRE

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