Cordial but inactive: Covid-19 has tested reinsurer relationships with governments

The pandemic has prompted considerable talk about the need for public-private partnerships (PPPs) to help facilitate insurance cover for super-catastrophic risks that the industry’s balance sheet cannot cover alone.

But in fact the debate is decades old. Twenty years ago the terrorist attacks of 9/11 that led to the formation of the industry’s most famous partnership with government – the US terror backstop created via the Terrorism Risk Insurance Act (Tria). With this in mind, The Insurer tracks how the sector’s relationship with policymakers is evolving.

The past 18 months have been somewhat of a bumpy ride for the (re)insurance sector, particularly where relations with governments have been concerned. The hurdles have been well documented with policymakers on both sides of the Atlantic doubling down on criticism of (re)insurers over their handling of the Covid-19 pandemic, particularly non-damage business interruption (BI) claims.

The systemic nature of the pandemic – a peril that cannot be modelled in absolute loss terms because it impacts multiple classes and geographies with the potential to create a financial shock – prompted the insurance industry to swiftly lobby governments about creating risk-sharing mechanisms for future pandemics.

Initially, there was much positive momentum with France and the UK (Stephen Catlin’s Pandemic Re proposal) appearing to lead the way.

But as 2020 progrossed, the early optimism that the pandemic could inspire a new flurry of risk-sharing initiatives between government and industry began to ebb away.

Government bandwidth

Speaking to The Insurer, Ivo Menzinger, head of public sector solutions for Europe, Middle East and Africa at Swiss Re, explained that while the industry’s efforts were initially met with support by policymakers, the reality of managing the crisis on a day-to-day basis meant governments had prioritised the former over creating future solutions.

“While there was initial interest of governments to engage with industry on the subject in the first half of 2020, most governments were completely absorbed with emergency management of the second Covid-19 wave and could not dedicate sufficient resources to drive a solution forward,” he explained.

“Governments have piled up further debt in the wake of dealing with Covid-19; they are now very reluctant to take on additional explicit liabilities that such a PPP would entail,” he added.

Menzinger noted that challenges also emerged from a design perspective, with disagreement within the industry itself over “controversial” items such as mandatory versus voluntary coverage as well as the extent of the government backstop.

Despite this, a number of smaller, temporary structures have emerged. The UK government last month announced it had partnered with Lloyd’s to deliver a £750mn ($1.01bn) government-backed insurance mechanism for live events, with Arch, Beazley, Dale, Hiscox and Munich Re supporting the initiative.

The plan – which will see the government act as a reinsurer of last resort for insurers – will be delivered through insurers, with event organisers able to purchase cover for government-enforced cancellation due to an event being legally unable to occur because of any future coronavirus restrictions.

Meanwhile the UK’s state-backed trade credit reinsurance scheme, launched in June 2020, was revealed by HM Treasury to have provided up to £190bn of cover to around half a million businesses before it was wound down earlier this year.

But Julian Enoizi, CEO of UK terrorism mutual Pool Re, said that while it is understandable that governments are reluctant to make long-term commitments whilst still not out of the woods in terms of Covid-19, these small schemes do little to build societal resilience for the future.

“This approach is essentially a sticking plaster and a potentially huge wasted opportunity to more fundamentally reimagine the possibilities for integrated PPP solutions to systemic risks that neither the public sector nor the insurance industry can adequately address alone,” he said.

The issue was also highlighted in a recent report by the Geneva Association, a leading industry think tank.

“Any form of government involvement in pandemic risk management comes with major trade-offs. Having said this, just waiting for the next pandemic to happen and then disbursing cash post-event is probably the least effective approach,” the report explained.

The future and cyber risk

Of course, pandemic is not the only example of a systemic insurance risk where government support may be required.

Dr Chris Wallace, CEO of the Australian Reinsurance Pool Corporation, said state intervention is required across all classes which are not insurable via the traditional model, or perils with tails so potentially devastating that insurers are forced to include policy exclusions for the very risks society and businesses require protection against.

Cyber risk is the most obvious example, he said. “Cyber risk is an area worth exploring as cyber risk has national security and economic impacts, and insurance should be a key part of a cyber security strategy,” he continued.

“Governments are not always enthusiastic insurers of risk and as such, any future government intervention should ideally be time bound with a plan for exit or transition to the private market,” he added.

Swiss Re’s Menzinger noted that the biggest needs are either to help cover highly exposed risk by providing financing via a cross-subsidisation framework – such as the UK’s Flood Re or Switzerland’s Elementarschaden-Pool – or to provide a backstop that allows controlled risk-taking by the industry via specialised vehicles such as state-backed terrorism pools, as with the aforementioned Tria, Pool Re or France’s GAREAT.

“The most relevant risks are therefore highly anti-selected risks such as floods and systemic risks such as BI following pandemics, systemic cyber, prolonged power outage and to some extent terrorism,” he said, noting that there are more than 100 possible permutations of PPPs with varying degrees of government involvement, rather than being a case of one size fits all.

Lessons in communication

While the sector has a long history of working with governments, there is definitely room for improvement in the way the industry communicates its value which goes way beyond providing financial capacity, said Laurent Montador, deputy CEO of CCR Re.

He said the sector must place an emphasis on the risk knowledge, scenario and modelling services and risk reduction advice it can provide to governments, adding that the sector’s ability to offer incentives to build resilience through adjusting premium rates is extremely valuable from an overall societal perspective.

CCR Re is the sister company to French reinsurer of last resort CCR, which also operates the country’s state-backed nat cat scheme.

As such it is able to maintain a consistent dialogue with French ministers.

“These relationships take time to build and require work to be maintained. We cannot expect ministers to take what we say as read and back our proposals at a time of national crisis if we have not started that dialogue before,” he said.

“The pandemic has highlighted this. We have an obligation to share what skills we have but first governments must be shown what we are capable of. This will lead to successful PPPs in the future.”