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Solutions will require both public and private sector involvement, and build on the following four key elements:
Insurance relies on risk pooling. If, as in the current pandemic, the event affects an overwhelming proportion of society, and on a worldwide basis, insurance cover will not be supplied by private insurance undertakings at any price since the risk cannot be pooled or diversified geographically. One estimate is that current business interruption premiums in some markets would need to be collected for over 100 years to cover two months of COVID-19-related business interruption costs. The lock-down measures, by which national or local authorities have restricted movement of (parts of the) population, have augmented the risk of business interruption.
On the demand side, inability to insure has significant wider economic and social consequences such as businesses and individuals being unable to obtain loans and mortgages. This may well be an important second round effect of the Covid-19 crisis.
There is in addition often a differential impact. For example, small businesses may find it harder to obtain cover (“availability) or only at an extreme price (“affordability”). Moreover, business interruption insurance for pandemics is not commonly offered in European markets, nor has there been any demand for such a cover before current pandemic.
Thus in circumstances such as the current Covid-19 crisis there are at least in the future likely to be market failures in respect of the provision of private insurance of both supply and demand.
In addition, pandemic risk exhibits so-called accumulation potential across several lines of insurance business, for example life and health, credit, travel, liability and others. Moreover, the asset side of an insurer’s balance sheet is also affected by the adverse market conditions caused by the economic impact of the response to a pandemic. According to the insurance industry these factors constrain the supply of insurance. Therefore it is evident that cover for pandemic risk cannot be provided solely by private commercial insurance and reinsurance systems. If the further availability of this cover is deemed necessary, some additional solutions should be found.
This paper identifies issues and options for developing possible shared resilience solutions addressing business interruption risk in the context of a pandemic. Crucial elements in increasing society’s resilience will be proper risk assessment, risk prevention and balanced solutions for risk transfer across private and public parties.
The issues paper is an EIOPA staff paper and does not necessarily reflect the opinions of all national supervisory authorities. The paper does not aim to set out a specific course of action, but highlights options that could be explored at national and European level. At this stage therefore issues such as legislative changes required are not considered. Nor of course does the paper make any assumptions regarding changes to the EU Treaties, the principle of subsidiarity, or competition laws.