By Huw Evans, Director General of the ABI
The last few weeks have demonstrated that a return to the status quo ante would seem undesirable. Whether in the US, Continental Europe or the UK, the insurance industry has come under fire because most business interruption policies do not provide cover for infectious diseases and those that do usually exclude unknown viruses like Covid-19. Instead, businesses are typically protected against day to day risks such as damage to premises, motor accidents, supplier failure and employee harm. Last year, in the UK alone, these types of everyday claims from businesses amounted to £7.8bn ($9.7bn) whereas claims for notifiable diseases were negligible. Because these claims did not come from all businesses at the same time, the insurance model worked and the claims were paid. This is not what happens with pandemics where everyone gets affected at the same time.
Policymakers and business leaders who would like to change this situation will have to recognise that no insurance market in the world can do it on its own. In the UK, we have the largest market in Europe and the fourth largest globally with London the international capital of speciality insurance and reinsurance. Yet even in the UK, providing widespread insurance cover against pandemics would be virtually impossible without state support because the amount of capital insurers would have to hold against the risk would result in completely unaffordable prices for customers. Last year, UK companies turned over £4.1trn and employed 27mn people. Insuring these businesses for pandemics is impossible using the normal model given UK insurers hold total assets of £2.2trn.
That is why we need to start thinking about new solutions. Partnerships between governments and insurance markets to help solve big problems are nothing new; so-called ‘protection gap entity’ schemes exist around the world, most commonly for flooding, terrorism and earthquakes. Here in the UK, we have Flood Re, which I helped set up, as well as Pool Re while other examples include the California Earthquake Authority, the CRC in France and the Earthquake Commission in New Zealand. Each is structured with different levels of state involvement but all seek to enable insurance protection for risks that would otherwise be uninsurable.
The size and scale of the government support packages and central bank interventions we have seen in recent days demonstrate amply why insurers have long been wary of the huge potential costs of protecting against pandemics. This is not market failure so much as recognising the limitations of the market; as Sir Charles Bean noted last week, the state is always the ‘insurer of last resort.’ Even then, UK insurers expect COVID-19 to be a major event with £275mn of travel insurance claims and insurance claims for cancelled events, school trips and some elements of business disruption to be paid.
But we all need to do better. In a 21st century world where the flow of people, commerce and infectious disease are more interconnected than at any time in human history, we need to be open to new ways to protect our economies from the risks posed by future pandemics. The state has to be front and centre of such efforts but both globally and domestically, insurers should also be part of the discussion. If global pandemics are to be a more regular part of our world, we need to start talking about how to protect more businesses and individuals than has been the case with COVID-19.
The UK insurance industry will be up for that debate.
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