Backstop solutions for future pandemics should operate across international borders and ensure carriers, governments and policyholders all have “skin in the game”, a panel has concluded.
In a session as part of the (Re)Connect virtual conference, hosted by law firm McDermott, Will & Emery, a panel of experts agreed that unlike some other backstops, a solution for pandemic risk would ideally be multinational.
Dirk Wegener, president of the Federation of European Risk Management Associations (Ferma), said national backstops tended to focus only on protecting against risks for which national governments are responsible, rendering them unsuitable for a global event such as Covid-19.
Sabrina Miesowitz, general counsel for Lloyd’s America, added that international cooperation was ideal but achieving that is not straightforward.
“There is always a desire for coordination, especially among the insurance regulators, but it’s important to remember in the US that the insurance regulators are not always the ones who are setting policy.
“They are certainly involved in the policy discussions, but a lot of the policy is set by Congress.
“I think that the US will do its own backstop or public/private partnership, but it will certainly be influenced by the discussions that are happening in other countries.”
Stephen Weinstein, chief compliance officer, general counsel and corporate secretary at RenaissanceRe, said: “There are only two things that we can do to reduce the cost. One is to invest in mitigation, and the other is to diversify the financing as much as possible. The best way to diversify the financing is to make it global.
“The reinsurance market inherently plays that role; it doesn’t have to be the only solution.”
The panel then addressed the merits of voluntary versus mandatory solutions, drawing on the examples of various flood and terrorism pools around the world.
Weinstein said: “We’ve had a variety of experiments, particularly in the US at a national level and a state level, to provide mechanisms to finance other forms of catastrophes.
“A variety of those lead us to the same ultimate outcome... Left to a purely voluntary consumer choice, this data shows we get to about 10% take-up and 90% non-coverage. A range of academic studies show it’s the wrong 90%.”
He added that national governments and the insurance industry should aspire “as a public policy goal and as a business aim” for consumers to have more “holistic” private coverage against catastrophes.
Ferma’s Wegener, however, said there were adverse consequences to mandatory schemes.
“Mandatory insurance schemes do often have the problem that it’s difficult to incentivise risk management, because typically they have just tariff rates… so then it becomes a little bit like a tax,” he said.
This means that good risk management cannot be rewarded with lower premiums, Wegener said.
Justin Wray, head of policy at the European Insurance and Occupational Pensions Authority (Eiopa), said it was possible in some cases to introduce an element of risk mitigation in some schemes.
Wray cited the UK’s Flood Re, in which cover for those in high-risk areas is subsidised by those in safer areas, and in which the insurance industry had agreed to provide cover while the UK government committed to spending more on flood defences.
Wray also said that any future pandemic backstops should obey the principle, as recommended in Eiopa’s recent guidance, of governments, insurers and assureds involved in any scheme having “skin in the game”.
“If you don’t [ensure this principle] you have misalignment of incentives, mispricing of risks and so on,” he added.
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