Governments must step in to provide pandemic risk backstop: Geneva Association
Governments must step in to provide pandemic risk coverage to enable businesses to prepare for future pandemic shocks, according to The Geneva Association (TGA).
It is impossible for insurers to model and price pandemic risk, TGA said, given the crucial role played by governments in implementing the lockdown measures that triggered many of the losses.
As a systemic risk, inducing widespread and simultaneous financial losses, the private insurance market will also be unable to provide pandemic coverage with meaningful limits, due to prohibitively high capital requirements, it added.
In a report titled Public-Private Solutions to Pandemic Risk, TGA highlighted four exemplary pandemic risk funding schemes where governments can play a leading role: direct insurance, where the public sector provides voluntary or mandatory insurance to businesses exposed to pandemic risk; government-provided reinsurance for private insurers above a given threshold and up to a certain limit; social insurance, where modest public-sector coverage is offered with mandatory participation through pre-event payments; and post-event protection, where the government provides an ad hoc safety net to those affected.
Kai-Uwe Schanz, TGA’s head of research and foresight, and lead author of the report, stressed that the last of these options - the option taken by many governments during the COVID crisis - is the least effective. “For the other schemes, deciding whether participation is mandatory or voluntary, as well as the role of insurers in pricing and offering coverage, are critical considerations,” he said.
Jad Ariss, TGA’s managing director, added: “It is a tragedy that businesses, particularly SMEs, have suffered so much financial loss during the pandemic as a result of the lockdowns, which were beyond their control. The public sector had to step in with multi-trillion dollar emergency relief measures. Governments and insurers must work together on how to close the massive protection gap exposed by COVID-19, with governments as the leading players.”
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