COVID-19 is causing substantial losses for companies around the world, and most of these companies do not have any insurance coverage to fall back on.
Pandemic risk is difficult to model and price so insurance carriers usually specifically exclude it or substantially limit available coverage. This traditional approach is now exposed as falling far short of what is needed. So, what can be done?
In the past, the insurance market has developed new coverages (for example, cyber, terrorism, autonomous driving etc.) as demand and risks increase or existing coverages don’t adequately respond to events. The emerging risk space is the gap between current insurance methodologies and financing methods and the exposures presented by new technologies and economies. To state the obvious, pandemic risk cover is now in demand as the majority of businesses suffer losses resulting from the COVID-19.
When the insurance market doesn’t evolve at a similar pace to demand, capacity constraints will occur and businesses and insureds will have no choice but to seek alternative solutions. As with similar situations in the past, the use of captives, as well as the capital markets, to finance emerging risk shortfalls and coverage gaps will increase.
Employee benefit coverage claims are also mounting. Never has there been a risk that impacted the entire world from an employee risk perspective as this pandemic has, according to Sven Roelandt, global expert employee benefits financing strategies and carrier relations at Aon.
Employers are discovering gaps in their employee benefits programme which will need to be funded from elsewhere unbudgeted, and this will undoubtedly prompt them to find alternative solutions going forward.
For both PDBI and employee risks, the challenge in finding alternative solutions will be in how these risks can be modelled, how to achieve better than predicted outcomes and how to recover from the impact. Captives can be at the forefront of those risk financing decisions and could play a key role in enabling a more resilient approach to managing supply chain, financial risks and employee risks.
The current and future impact of COVID-19 will certainly lead to a more formalised planning of future pandemics that will go way beyond the note disclosures in financial statements. Supply chain disruption, non-material damage losses and employee-related claims as well as governmental and regulatory stakeholder intrusion, to name a few, will need more comprehensive risk management approach than today, and from all stakeholders, given the global impact, we are now seeing.
In Aon’s 2019 Global Risk Manager Survey, pandemic risk ranked outside the top 50 risks. Clearly the pronounced global damage we have seen with COVID-19 should mean pandemic readiness is an annual consideration alongside the going concern status of any business, big or small.
The information contained in this article is intended to assist readers understand COVID 19 issues and is for general guidance only.
Elizabeth Steinman
Managing director of risk finance and captive consulting commercial risk solutions
Aon
