As insurers around the world contemplate developing public-private partnerships to insure future pandemic events after Covid-19, parametric structures are emerging as a front runner for platforms designed to assist smaller businesses.
France, UK and US all looking at parametric triggers
Catlin’s Pan Re to submit findings in September
US parametric trigger alternative proposal to PRIA initiative
Ferma pushes for pan-European solution
The Insurer can reveal that working groups in France, the US and the UK are all contemplating the merits of parametric triggers as a swift mechanism to trigger payments to SME enterprises that are affected by the next pandemic outbreak.
These triggers – common in ILS products – enable a swift pay-out unrelated to the underlying loss as long as particular conditions are met and are increasingly seen as an effective way to get funds to affected businesses without the delay and complications of having to establish an insured loss and consequential flow of damages.
In France, an industry working group established by Finance Minister Bruno Le Maire is mulling a parametric-type trigger as part of an initiative that will be funded via an obligatory extension to all business’ property or BI policies.
The French Insurance trade body, FFA, is proposing a flat-rate payout to help insured companies cope with significant decreases in activity linked to an exceptional event, such as a pandemic, in a scheme called “CATEX”.
A strength of parametric triggers is they offer a guaranteed and swift payout mechanism in the event of a catastrophe without the complications and potential expense of pricing loss and causation.
Across the Channel and there are at least two specific groups working on future solutions – and both could also involve a parametric trigger.
On Lime Street, the mechanism is being explored by members of CEO John Neal’s pandemic working group which is headed by Ascot CEO Andy Brooks, Aon’s Dominic Christian and Guy Carpenter’s Vicky Carter, The Insurer understands.
But the main UK-wide industry initiative is the “Pan Re” steering group established by Convex founder Stephen Catlin.
Speaking before the group was formally created, Catlin told this publication: “A parametric solution has a number of characteristics which would make for an effective pandemic solution.”
He added: “While it is too early to say if this will be the method of choice, parametric triggers are currently being more than likely to be considered, examined and modelled as part of our investigations.”
The steering group – which has given itself a September deadline to develop proposals for a public-private solution that could be developed with the UK government – is now examining the merit of parametric triggers focussed on cover for SME businesses, such as restaurants and hotels.
A spokesperson for the Pan Re steering group told this publication: “No decisions have been made on the proposed structure of Pandemic Re. However, the group is looking closely at the merits of non-indemnity loss triggers especially as regards non-physical damage business interruption cover for UK SME businesses”.
The spokesperson continued: “The working group remains on course to submit its initial findings by September 2020. We are delighted by the level of engagement from the UK insurance industry and look forward to working closely with HM Treasury to develop a robust solution to the pandemic peril that will give confidence to British businesses and improve the economic resilience of the national economy”.
Heading the structuring working group and also chairing the Project Committee is Michael Dawson, a well-known Lloyd’s figure who heads the Chaucer nuclear Syndicate 1176.
Lloyd’s has yet to comment on its pandemic working group but may do so next week when it is expected to publish a paper looking at this and other initiatives, such as Black Swan Re and Recover Re.
The moves in France and the UK join other international initiatives to establish pandemic risk insurance backstops and risk pools, to provide extra capacity to ensure pandemic risk protection can be more all-encompassing and responsive should future outbreaks arise.
In the US, there are discussions afoot to see whether a parametric trigger could replace or possibly sit alongside the proposed PRIA initiative. As currently drafted, PRIA would create a federal backstop with a trigger of $250mn and an annual cap of $750bn, with the government taking a 95 percent share of losses in excess of the deductible up to the aggregate cap.
In contrast, three insurance trade groups have proposed a programme with a parametric trigger because they believe the uninsurability of pandemics means PRIA is unworkable. The Business Continuity Protection Program (BCPP) would provide business revenue replacement assistance that would reimburse up to 80 percent of payroll, benefits and expenses for three months.
The American Property Casualty Insurance Association (APCIA), National Association of Mutual Insurance Companies and the Independent Insurance Agents & Brokers of America believe a parametric proposal is the correct solution because having to prove specific losses would take too long for businesses to get relief.
“This is not an insurance programme because to provide relief on that scale and make it immediate you have to make it, not an insurance product, but rather an immediate parametric relief product,” Robert Gordon, senior vice president of policy research and international at APCIA, told this publication last month, explaining the BCPP.
Insurers’ role under the BCPP would be distribution and sales of the product.
This publication understands a third US proposal is also being readied, although its structure is unclear at this point.
One supporter of introducing a parametric structure for BI insurance to smaller companies is thought to be Evan Greenberg, the president and CEO of Chubb and an industry representative on President Trump’s 200-strong pan-industry Covid-19 task force.
While much of the debate around pandemic solutions has been limited to within national borders, Europe’s Federation of European Risk Management Associations (Ferma) last month called on the European Commission to create a EU-wide resilience framework for catastrophic risks such as epidemics, terrorism and cyber.
Parametric solutions have already been tried with pandemics, most notably through the World Bank’s pioneering $320mn pandemic catastrophe bond.
The instrument – launched after the 2013-2016 Ebola outbreak that ravaged Sierra Leone, Guinea and Liberia – was set up under the World Bank’s Pandemic Emergency Financing (PEF) umbrella in 2017 to move private capital to the world’s poorest countries in the event of a pandemic.
The World Bank has confirmed Covid-19 has triggered the bond.
While at the beginning of the week, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) confirmed it had paid the Government of Guatemala $3.6mn under an excess rainfall (XSR) parametric insurance policy for nine days of rain that occurred during Tropical Storms Amanda and Cristobal.