19 October 2020

CRE: Ferma president urges insurers to improve pandemic response

Insurers need to be more proactive in their response to the coronavirus pandemic and work with governments on solutions for systemic risks like pandemics and cyber, according to the president of Ferma.

Insurance buyers are “disappointed” with the insurance industry’s response to the pandemic that has led to further market hardening and restrictions on cover, Dirk Wegener told Commercial Risk Europe. He called on the industry to take a more positive stance and help business and society build resilience, rather than “shy away” from systemic risks and non-damage business interruption.

 “We have all been surprised by the coronavirus, and the market was already hardening before the outbreak. However, I would like to see good communication of decisions and trends by insurers, as well as a more positive response to the risks we now face,” said Mr Wegener.

 “I would encourage insurers to be more confident in their own expertise and skills, and think about how they can bring that to the table through an offering going forward. It would be difficult, at the end of all this, if insurers have just shied away from the challenge and disappeared from the debate,” he added.

 “The unfortunate situation with Covid-19 adds to the trend of the hardening insurance market, which has led to a reduction in capacity and limits and an increase in coverage restrictions for many commercial insurance buyers. Covid-19 has accelerated that trend, but at the same time exposed a new set of exposures for risk managers,” he continued.

Mr Wegener said the pandemic has raised awareness of risks posed by infectious disease outbreaks. It has also raised concern over other potential sources of systemic risk, such as a major cyber outage or climate change, he added.

“Pandemic risk was on companies’ risk registers – it was on their radar. But no one envisaged an outbreak of this magnitude. But there are other scenarios that could have the same systemic potential, such as cyber. There is more focus on systemic risks, which are extremely difficult to insure, which has coincided with the hardening market,” he said.

At a time of changing risk, insurability appears to be reducing, according to Mr Wegener.

Risk managers have long warned of the rise in intangible risks at the expense of traditionally insurable property and casualty exposures. Insurers have also highlighted the problem of large losses, with increased values and concentrations of risk driving ever larger claims.

Now, systemic risks can be added to the list of relevant exposures for corporates that are difficult to insure, Mr Wegener said. “The insurance industry’s response has been to make sure that these types of systemic risks are not covered, and there is an increased perception that the insurability of risk has reduced yet again,” he said.

The combination of Covid-19 and the hardening market is leading to further restrictions in coverage, continued Mr Wegener. “Insurers are tending to further restrict their offering and demand higher prices and premiums. This is not good for buyers. Coronavirus is a threat to all corporates and many are struggling. If you are the person responsible for the insurance spend, telling the c-suite that they must pay more, while getting less insurance, is not an easy message to convey,” he said.

There is also some concern that insurers’ response to Covid-19 will go beyond infectious diseases, and carriers will restrict cover for other potentially systemic risks like cyber, according to Mr Wegener.

 “As a consequence, insurers might not feel as confident underwriting cyber risk as they do today. Cyber is one of the few areas of innovation and it would be a difficult message for risk managers to convey to the c-suite if they are unable to buy the same level of cyber cover because the market has reduced its offering,” he said.

Ferma’s president noted that the situation with Covid-19 has parallels with the aftermath of the 9/11 terrorist attacks in 2001. After that event, insurance cover became more restrictive and capacity reduced for terrorism risk. This resulted in the creation of state-backed terrorism pools in many countries, including the US and parts of Europe.

“Insurance is very important to facilitating economic growth. Today, we find ourselves in a similar situation to 9/11. Buyers want broader cover but insurers offer exclusions. However, it would be good to see a similar initiative to establish a public-private partnership to enable the insurance sector to stay engaged in risk transfer for pandemic risk, and for systemic risk more widely,” he said.

In May, Ferma wrote to the EC proposing an EU resilience framework for catastrophic risks to address a “severe shortage” of business interruption insurance without physical damage. It then took part in an Eiopa working group that explored potential public-private partnerships. The European Commission has now set up a working group to deliver risk transfer solutions for pandemics and other catastrophe risks. It will consider a pan-European private-public pool with EU funding at the very top.

Ferma welcomes this move by the Commission that brings its resilience proposals a step closer.

Mr Wegener believes Ferma’s risk transfer resilience framework – which includes insurers, brokers and risk managers – is the most efficient and effective way to help society prepare for the next big catastrophe.

Risk managers identify risks and put in place loss prevention and mitigation measures, supervised and advised by insurers, who are experts in risk, he said. “Who else is better positioned than these two parties to find a solution?” added Mr Wegener.

 “Insurers and brokers have the technical knowledge to price risk. There is an established process where smart people sit together and agree to contractually transfer risk from a corporate to an insurer, reinsurer and capital markets. We want to see this market intelligence used to make a contribution and help create a more resilient future,” he said.

 “The beauty of our concept is that it is risk-based. It would incentivise corporates to prepare and put risk management and business continuity plans in place. It creates a transparent and proactive plan to respond and prevent losses, even before the exposure materialises. It is a more effective use of taxpayers’ money than relying on governments providing financial support as a first response,” added Mr Wegener.

Ferma’s proposals would see the insurance industry, backed by government, provide non-damage interruption insurance for systemic events like a pandemic or cyberattack. The industry would administer the offering, but would also have to take on some of the risk.

Initially, the solution would probably focus on pandemic risk but expand to other systemic risks over time, Ferma’s president told CRE.

 “Insurers will need to have some skin in the game. While the capital base of the insurance industry is not enough, over time that will hopefully change and the sector will build a dedicated capital base for these types of exposure,” he added.

CRE

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