The anticipated fallout from Covid-19 has caused a spike in interest from public sector bodies in budget insurance, with a growing number of organisations considering coverage in advance of expected funding cuts.

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Various US government organisations already utilise private markets such as insurance, reinsurance and the capital markets to manage volatility, with one notable example being the Federal Emergency Management Agency’s purchase of reinsurance for the National Flood Insurance Program.

And there is now growing interest from public sector entities, be they local, state or provincial, in seeing what the (re)insurance industry can offer when it comes to transferring financial risk off their own balance sheets, especially in light of anticipated hit to budgets likely to materialise in the wake of the Covid-19 outbreak.

The Covid-19 lockdown has led to a drop in economic output. This will in turn have a knock-on effect on budgets, with recent Moody’s analysis estimating the shrinking economy could see state budgets shrink between $158bn and $203bn through the end of fiscal year 2021.

At the same time as state and local governments seek to balance budgets with lower than expected revenues, the financial threat posed by natural catastrophes remains. Consequently, public bodies are seeking ways to transfer some of that risk.

Interest spikes

“We’re seeing a lot of interest,” Katie Sabo (pictured left), state and local leader for Aon Public Sector Partnership, told The Insurer, with the Covid-19 outbreak being the catalyst for this surge in inquiries.

Pre-Covid-19, Sabo said, discussions on budget insurance were “a slow burner”, with public bodies spending a long time deliberating over the benefits such coverage would provide.

However, with the pandemic having hit budgets so hard, Sabo said public sector organisations are evaluating all options available to them in advance of expected funding cuts and a desire to limit any potential tax increases.

“In this post-Covid age where budget officials are really thinking about all of the tools that are available to them, this has been a growing area of interest for them to explore”

Katie Sabo, managing director, Aon Public Sector Partnership

“In this post-Covid age where budget officials are really thinking about all of the tools that are available to them, this has been a growing area of interest for them to explore given the constrained amount of resources that are currently available to states and provincial entities and even counties,” Sabo explained.

The public sector does already utilise the (re)insurance industry, and Aon has some 3,500 such clients on its books around the world. But there is now a notable increase in enquiries from other public bodies looking to tap into the market.

Nat cat coverage

Of particular interest are parametric products that respond to catastrophe events such as hurricanes, earthquakes, droughts and wildfires.

Natural disasters in the US caused $32bn of uninsured losses in 2019, with federal, state and local governments frequently forced to make up this shortfall. This is where the parametric products come into play. The products are based upon a pre-agreed and easily identifiable event trigger, which provides transparency to all parties and interested stakeholders, for example taxpayers.

Should the coverage be triggered, the insured would receive funds that could be utilised in whatever manner they see fit, for example meeting immediate budgetary needs, replenishing reserves, or to provide support to businesses or individuals that may need it.

With budgets constrained in response to the expenditure related to managing the Covid-19 outbreak, these products can provide a solution with guaranteed costs.

Trade body support

And trade bodies agree this is something that should be considered by federal, state and local governments.

The Government Finance Officers Association, a trade group for state, provincial, and local government finance officers in the US and Canada, has also given its views on the subject of parametric insurance. A report published by the group earlier this year told members that “it is important for local governments to consider new risk management tools, like parametric insurance”, citing the increased number of natural disaster events.

“Governments as they become more educated about this are going to see it as a tool in their tool kit”

Joe Monaghan, CEO, Aon Public Sector Partnership

Sabo conceded some education is still required and that, while there is interest, that will not necessarily translate to actual risk transfer taking place. She is, however, optimistic that the future for this niche segment looks positive.

“For the public sector, they’re dipping their toe into something and exploring something that they have not typically done before,” Sabo said.

“The fact we’re getting questions and emails and calls about it is an indicator that there is a lot of interest and that there might be a large uptick in more officials, states and cities and counties that will explore tools outside of their typical budget mitigation tools,” Sabo added.

Joe Monaghan (pictured right), CEO of the Aon Public Sector Partnership, said there can be some scepticism from insurers and reinsurers alike about having government as client, while the opposite is also true, with some public bodies wary of transferring risk to private markets.

Key to the sector’s progression is education, with Monaghan and his team providing information to interested parties on the benefits of partnering up.

“Where we see a lot of future opportunity is in areas of risk that governments have historically retained that volatility,” he said, with cyber one notable example.

“Governments as they become more educated about this are going to see it as a tool in their tool kit,” said Monaghan.

“I think governments increasingly are going to see the value of having some certainty around their budget dollars so they can sustain future investment,” he added.