Future pandemic risk should be tackled via public-private partnership

Given the systemic risk posed by the pandemic, public-private partnerships to address the disastrous effects on businesses related to COVID-19 are warranted.

In a recent commentary, AM Best said that it expects significant reserve uncertainty arising for the current accident year given the challenge for insurers to estimate ultimate losses resulting from the COVID-19 pandemic and the related shutdowns. 

While social inflation combined with lawsuits addressing liability policies will drive defence containment costs significantly higher, court decisions will influence actual claims pay-outs. Such developments will create challenges in determining prudent reserve estimates and pay-out patterns. 

In addition, a number of legislative and policy measures are being contemplated that would nullify business interruption coverage exclusions in commercial property policies and force insurers to compensate policyholders for risks that were excluded during underwriting. Insurers with smaller capital bases, in particular, would be more vulnerable to these measures. 

Therefore, any public-private partnership adopted to fill this protection gap should take into account the capital supporting all risks held by insurers according to AM Best. Such a consideration is critical due to the uncertainty inherent in taking on those risks. 

“Pandemic risk does not afford insurance companies any geographic diversification due to its global nature. Diversification by line of business also is not possible, as the current pandemic has demonstrated via the number of lines affected,” said AM Best chief rating officer Stefan Holzberger.

He noted that insurers might be able to offer limited protection against pandemic risks, but these limits would be insufficient for a full recovery. 

Thus, he suggests that only a governmental programme or perhaps a public-private partnership could provide the backstop sufficient to compensate for lost revenue to businesses. 

 

Source: Asiainsurancereview