The European Insurance and Occupational Pensions Authority (EIOPA) published, on Monday 27 July, its Issues Paper highlighting options for developing “shared resilience solutions” for pandemic risk.
The Covid-19 health crisis has indeed highlighted the shortcomings of the European insurance systems and EIOPA seems to want to draw lessons from it. “While it is clear that insurance cannot cover the full costs of pandemics, insurers and reinsurers should be part of the solution and not part of the problem”, said the authority's president, Gabriel Bernardino.
In some Member States, notably in France, the idea of setting up a pandemic insurance scheme is already being considered (see EUROPE 12472/27). The European Commission has also recognised that future consideration will need to be given to how the insurance industry can best cover pandemic risks (see EUROPE 12496/14).
The paper, produced after consultations with the insurance and reinsurance industry, highlights options that could be explored at national and European level.
According to the EIOPA, solutions will require the both private and public sector involvement and will be based on four key elements: - proper risk assessment; - risk prevention and adaptation measures; - appropriate product design; - risk transfer.
Non-damage business interruption insurance (NDBI) already exists, but is not often offered in European markets and pandemics are generally excluded.
One option would therefore be to provide NDBI coverage for pandemics that is both simple and transparent. Nevertheless, pandemics would remain difficult to insure, since some of the negative economic consequences are the result of government decisions rather than the pandemic itself, EIOPA points out.
Other more limited alternatives could be to target, with these products, only small and medium-sized enterprises, which are considered more vulnerable in times of crisis, or to opt for parametric insurance, often used to cover climate risks.
According to the EIOPA, a shared resilience solution should also allow a transfer of risk between different levels: - the insurance sector; - the reinsurance sector or the capital markets; - the national government; - the European Union.
At the national level, possible options for risk transfer include the introduction of mandatory coverage for business interruption in the event of a pandemic, the establishment of insurance and reinsurance pools or the development of capital market solutions for the diversification of pandemic risks.
What role for the EU?
“A layer including an EU-wide intervention could be justified by the pan-European nature of the pandemic crisis”, according to EIOPA.
The type of involvement could range from encouraging or promoting risk prevention and incentivising and coordinating national measures, to providing financial support for the recovery from the pandemic, through, for example, a funding-type mechanism or based on a reinsurance-type mechanism.
According to the paper, such a European reinsurance mechanism could resemble a mechanism whereby the EU would act as a reinsurer above a certain threshold of accumulated losses at national level in exchange for a percentage of the premiums collected by (re)insurers and financed by Member States' guarantees.
If a common framework for pandemic risk is established, the EIOPA does not rule out the possibility that it could be extended in the future to other gaps in European insurance systems, for example to the effects of climate change or terrorism.
Interested parties have until 25 September to comment on these options. See Issues Paper: https://bit.ly/32XQQMF (Original version in French by Marion Fontana)