MMC executives in an interview with The Insurer have suggested nation states could come together to provide a wider solution for cross-border threats like pandemics and cyber, while also revealing they are not wed to any one idea for covering pandemics in the US.

Nash and Prieb

A wide range of potential solutions is being considered around the world for protecting against future pandemics.

In an interview with The Insurer, Guy Carpenter chairman David Priebe noted the circumstances in each nation state are quite different even though Covid-19 is affecting everyone globally.

“Many of the measures that countries are taking are similar, but when it comes to how the underlying insurance industry has provided this coverage or not it varies by country,” Priebe said. “A localized country by country approach is also the case as it relates to action taken by governments. So I think the base solutions will be tailored to what is appropriate for that jurisdiction.”

A solution that can cross borders

But Priebe raised the possibility that further down the line countries could collaborate to create a superregional solution for systemic risks.

“The longer term issue is: because situations like pandemics and cyber see no boundaries or borders, can nation states come together to provide a wider solution or not?” he said.

This is one of the questions that is being explored by the Organisation for Economic Co-operation and Development (OECD).

Last month the OECD held a roundtable that included almost 100 participants. Representing the insurance industry were Priebe giving the private sector perspective and Pool Re’s Julian Enoizi and CCR’s Laurent Montador giving a public sector viewpoint.

David Priebe

This followed the recent release of a paper by the OECD on the role that public-private partnerships could play, giving perspectives from policyholders, industry associations and regulators.

“They are making sure various perspectives are understood,” Priebe said. “So when the debate continues, either on a global or super regional level at least some of that information and the thought gathering process is already done.”

For now, countries are still in crisis mode tackling the Covid-19 crisis. At the same time, many countries are grappling with how to prepare for the next pandemic.

“I think initially each country is going to have to do what’s right for their own nation state, and it really comes down to funding,” said Priebe. “Who is going to fund this exposure? Clearly, given the scope and size of the exposure it is going to have to be predominantly, if not exclusively, all governmental and therefore the solutions will likely be local,” said Priebe.

Not wedded to one solution

As this publication has reported, some countries are contemplating developing public-private partnerships to insure future pandemic events, with parametric structures emerging as a potential mechanism to do so.

US prospective pandemic proposals

France, the US and the UK are all contemplating the potential merits of parametric triggers as a swift mechanism to trigger payments to SME enterprises that are affected by the next pandemic outbreak.

A recent Marsh report noted that a range of existing public-private risk-pooling models can be used to create a solution in the US. But the broking firm stressed that the US government is the only entity with the financial resources to help close the pandemic coverage gap.

Marsh CEO John Doyle at the end of March wrote to leaders in Congress to propose a pandemic risk insurance programme that would be structured as a risk-sharing model between policyholders, insurers and the federal government.

This was followed by the introduction of the Pandemic Risk Insurance Act of 2020 (Pria) by Representative Carolyn Maloney at the end of May. It is based on the US terrorism insurance backstop, and establishes a system of shared public and private compensation for business interruption losses from pandemics.

James Nash

But Priebe stressed that MMC is open to other solutions other than Pria.

“Our number one goal from the outset is there needs to be a forward solution for pandemic risk for businesses to create future resiliency for the US and global economy,” he explained. “We are not wedded to any one approach, other than we need an approach that meets the needs of our customers.”

Insurance heavyweight Chubb on 8 July released its own public-private partnership proposal for protecting against future pandemics in the US. This means three proposals have now been floated in the US. In addition to Pria, three insurance associations have proposed a programme with a parametric trigger in which insurers play a purely administrative role.

Chubb’s Pandemic Business Interruption Program is a two-part public-private partnership with a parametric trigger for small businesses and an indemnity trigger for large businesses.

The small business programme would see the industry initially provide $15bn of overall coverage rising to $30bn over time with a government backstop taking total coverage up to $750bn.

The Financial Times quoted Marsh CEO Doyle as describing the Chubb plan as “a significant step forward in creating a public-private solution”, suggesting the broking giant is open to more than one solution to the problem.

When asked how big a role intermediaries can play in pushing the debate forward, Priebe replied: “We view it as a responsibility to take a leading role in advancing these discussions. That is why John Doyle initially called for a forward looking pandemic solution as the customers of Marsh and Marsh & McLennan Agency were asking for a solution. We thought it was important to get the dialogue moving and stay part of that dialogue, not just in the US, but around the world.”

Priebe comments that Covid-19 has led to the realization that the systemic risk from pandemics needs to be addressed. He identifies systemic cyber outage and NBCR terrorism as two other systemic risks.

“Those are the three black swans we envision right now and potentially an ultimate government owned backstop can address those difficult to insure, if not uninsurable, risks with everything else insured within the contours of the private market.”

Evolving a private pandemic market

James Nash, international CEO at Guy Carpenter, notes that the ultimate backstop for all the systemic risk is the taxpayer. But insurers have a role to play in covering these risks.

“The question is creating a risk framework around the national risk register for those either globally systemic risks, of which there are not many, and national risks. Not just creating a public-private partnership but also creating private market capacity around the scheme,” Nash said.

He continued: “For pandemic, once we create a product for the primary customer we will then be able to evolve a private market outside the standard product. If you think about war, which is a globally systemic risk, there is a war market outside the standard exclusion. So we will see something similar evolve for pandemics. For cyber, it has already happened where the systemic risk is excluded but it needs to be better defined.”

Priebe added: “Ultimately if there is a broader framework that is created around the world there will still be need way beyond the solutions provided by those facilities. And I think that is where the private market can continue to come in and play a role in providing excess coverage or wrap around coverage that may be broader than what is provided at a national level.”

A big source of private market capacity could be Lloyd’s, which has traditionally provided a home for hard to place risks.

“There is discussion that they are going to try to raise some capital to try to provide some bespoke solutions,” said Priebe.

He added: “You have multinational companies that may access the national facility but ultimately we will also need a global solution to cover exposures that are not fully addressed in those national schemes. Lloyd’s would be a phenomenal place to be the vehicle for that. John Neal and others have been talking about how that could be done.”

Nash is a member of the so-called UK Pandemic Re steering group which was established by Convex founder Stephen Catlin and is expected to unveil a possible UK future pandemic public/private solution in September.