Speaking to The ReInsurer via video interview and also at a virtual media briefing yesterday, Stefan Golling, chief underwriter at Munich Re, explained the cost that insurers have incurred for Covid-19 losses is “significant” with the claims burden already nearing that of the most costly natural catastrophes.

Despite the industry being exposed to pandemic risks through multiple lines – notably life and health, event cancellation and contingency, liability and travel – the greatest economic losses have been caused by business interruptions owing to government-imposed lockdowns across the globe, Golling noted.

Given that these BI losses occurred almost simultaneously across many sectors of the economy, they are not insurable by the private sector alone, he said, reiterating the need for government-backed reinsurance solutions to cover pandemic risks in the future.

“We need new reliable mechanisms to insure such risks,” Golling said. “The only way to achieve this is by creating state-backed risk pools in which insurers can participate with limited capacity. Furthermore, insurers can help to assess risks accurately and organise distribution and claims settlement.”

Golling said a pan-European or pan-Asian model would be “ideal” but noted that the work needed to ensure the political hurdles are overcome renders such a solution almost impossible. Instead, national solutions are favoured.

National pandemic pools should be kept “simple” and should only focus on pandemic as a covered peril, Golling said. Cover should focus purely on non-damage business interruption and should be made mandatory.

Parametric coverage is also favoured to ensure quick payouts, he added, with two “clear” triggers needed. The first would be a declaration of a pandemic event by a body such as the WHO and the second would be the presence of a legally-mandated lockdown for the insured.

Munich Re’s chief underwriter pointed to data from the American Property Casualty Insurance Association (APCIA) which estimates that US insurers’ risk capital would have been fully consumed within a matter of weeks if business interruption losses owing to the coronavirus had been covered.

Munich Re reported in July that it was facing a Eur700mn ($799mn) charge in the second quarter for Covid-19-related losses, driven by event cancellations and postponements. The Q2 Covid-19 hit came after Munich Re revealed it expected to suffer Eur800mn of losses in its P&C business in Q1.

The scale of such losses has shown the world how vulnerable it is to very large risks and ought to be a “wake-up call” for economies to better equip themselves for extreme risks of this nature, added Torsten Jeworrek, Munich Re’s reinsurance CEO and a member of the company’s board of management.

While pandemic remains in the focus, the (re)insurance sector must not lose sight of major threats such as cyber and climate change, Jeworrek said, adding that the consequences of such risk “could be even higher” in the long run than those of a pandemic.

“The coronavirus pandemic needs to be a lesson to us all: We must take action more rapidly and vigorously to ensure that we are not as unprepared as we were with Covid-19 for risks such as cyber attacks or climate change,” Jeworrek explained.

“It is possible to better safeguard against the financial consequences of such risks for the benefit of humanity. It needs to be clear that systemic risks like pandemics also require systemic countermeasures – for instance, the creation of state-backed risk pools to make uninsurable risks bearable.”

Munich Re’s call for a state-backed reinsurance solution comes as insurers and trade associations in Britain, France, Germany and the US are seeking government-backed cover for future pandemics, similar to existing pooled insurance schemes for damage due to terror attacks such as the UK’s government-backed Pool Re. 

While most potential solutions are structures are seeking to provide cover which remains within national borders, the feasibility of pan-European solution is being pushed forward by the European Insurance and Occupational Pensions Authority (Eiopa) which last month published its review paper that outlined possible insurance problems and solutions to tackle pandemic risk.

There have also been plans outlined for a broader systemic risks solution such as Black Swan Re, a government-backed vehicle to insure against future systemic risks developed by Lloyd’s.