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In a letter to the EC, Ferma sets out its vision for a multi-layered and graduated public-private partnership to ensure companies across Europe can protect themselves against NDBI.
The federation’s proposed Resilience Framework for Catastrophic Risks (RFCR) aims to tackle the fact that there is currently little to no insurance coverage available for financial losses from NDBI in case of catastrophic risks, such Covid-19.
Ferma recognises that a “uniform, homogeneous solution at European level is impossible” due to the high complexity of national insurance markets. Therefore, the RFCR published by a Ferma taskforce and would function at four levels:
Enterprise-level risk management: anticipation, prevention, identification and mitigation of risks
Transfer of risk to private insurance and reinsurance markets, developing enhanced coverage for NDBI
National member state pool guarantees
European Union support for, and coordination between, national governments.
The RFCR would cover all catastrophic, systemic NDBI risks, including pandemics or a massive cyber attack.
Ferma president Dirk Wegener commented: “We now aim to deepen discussions with the EU, the member states and the insurance sector, and to develop solutions for both short-term crisis management and long-term business resilience. Ferma members have expertise and experience in the field of business interruption that we want to contribute to the future resilience of European business.”
In response to the Covid-19 crisis, a few EU member states – such as France, Germany and the UK – envisage expanding their existing national pooling schemes to address systemic risks.
Ferma says that while national catastrophe pools are useful where available and should be utilised, their geographical reach and existing coverage for cross-border NBDI is limited.
“Indeed, the lack of cross-border coverage is antithetical to the European single market and the freedom of movement of capital and services. Without a framework for cross-border coverage, the EU insurance market remains fragmented, disrupting the functioning of the internal market, especially when NDBI occurs as a result of events in another member state, outside the scope of existing national pools. In order to increase harmonisation across member states, a European response is needed that upholds the principle of subsidiarity,” it states.
Therefore, Ferma believes it is vital that any system, such as the RFCR, is centrally managed.
“Although national efforts to repurpose current pooling schemes will hopefully be successful, these solutions are geographically limited and should be complemented by a larger framework built on partnership between all relevant stakeholders. Hence, it is essential that the RFCR is managed by an organisation under the governance of the EU,” states Ferma in its position paper.
It says coordination across the insurance sector, national governments and EU institutions is necessary to incentivise the accumulation of reserves for pandemics and other catastrophes ahead of a crisis.
In addition, the RFCR will optimise the use of taxpayers’ money by giving enterprises fair access to state funds, says Ferma.
“Insurance-based schemes, such as the RFCR, permit the establishment of clear and proportionate parameters utilising tried-and-tested risk management methodologies, such as enterprise risk management, that can accurately assess contributions that may be required by enterprises in order to access the system. The RFCR will therefore enhance business resilience by incentivising risk management methodologies that encourage the prudential assessment and identification of risks needed to access public funds,” it says.
“An RFCR framework will support the development of NDBI coverage that will give European enterprises the financial security to maintain flexibility in the face of catastrophic events, and incentives to apply risk management methodologies throughout the continent,” it adds.
Mr Wegener says the framework’s holistic approach would ensure it has the capacity to benefit all businesses, from small and medium-sized enterprises facing immediate liquidity issues, to the largest transnational corporations concerned with supply chain and trade disruptions.
Ferma’s move follows news broken by CRE last week that the EC has told campaigners it is exploring proposals to create public-private-partnerships, or pools, to protect against future pandemic risk.
The European Insurance and Occupational Pensions Authority (EIOPA) has also backed the moves, with sources explaining that it first wants to explore national schemes and then potentially look at a pan-European solution.
The Commission responded positively to a letter sent by Marsh & McLennan last month on the creation of public-private-partnerships across Europe for pandemic risk, and wants to work with risk managers, brokers and insurers to come up with a solution as part of wider efforts to manage Covid-19.
The campaign to push for state-backed pandemic insurance pools kicked off in early April, when Marsh & McLennan sent a letter to the EC asking it to consider public-private partnerships to protect business and society from future pandemic risks.
The broker said such solutions are the only viable option moving forward to cover a risk that is simply too large for the insurance market to handle on its own. It said all parties – policyholders, tax payers, insurers, reinsurers and government – should take part in discussions on the topic, and urged the EC to take the lead.
“The level of involvement of the different parties and exact setup of these public-private partnerships will differ between member states, but we all have to work together to close this protection gap,” wrote executives from Marsh & McLennan, as the firm offered to provide its expertise to move things forward.
Just days later, Ferma sent a letter to the EC proposing something similar. It suggested a coordinated approach to create state-backed pandemic insurance pools, possibly supported by an EU backup layer via the European Stability Mechanism.
Ferma then went a step further and called for any solution, or pool, to cover all catastrophic NDBI risks. The federation and its member associations also launched a taskforce, which has now proposed the RFCR.
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