Cedric Stephens | The insurability of losses caused by pandemics

ADVISORY COLUMN: INSURANCE HELPLINE

Last Wednesday night my wife unexpectedly shared with me a message she received from a WhatsApp group.

It originated from the Catholic Media Services Limited, CAMSEL, the communication arm of the Archdiocese of Port of Spain. It produces Trinidad & Tobago’s oldest newspaper, Catholic News.

In a note dated March 4, titled “Update on COVID-19”, it spoke about precautionary measures that must be implemented immediately at all masses and services in the Catholic Church. The aim is to prevent the transmission of the coronavirus.

Eight dos and don’ts were listed. The local sender of the letter said the Catholic Church in Jamaica was discussing whether to introduce similar rules.

My wife was unaware that earlier on Wednesday I had decided that today’s article would be about insurance and pandemics. The decision was influenced by several articles in that edition of this newspaper, among them:

• the projected $76 billion revision in revenue from this tourist industry from the government’s recently announced 2020-21 budget as a result of threats caused by the coronavirus.

• the controversy between cruise ship interests and the health ministry about whether passengers from these vessels should continue to be allowed into the island.

• the prediction by a UWI economist that the virus could send the world economy into a recession.

• the possibility of the cancellation of the Tokyo Olympics in July.

• the ongoing efforts by the Ministry of Health & Wellness to minimise the threats.

• the actions of the US Federal Reserve to slash interest rates to reduce the impact of the economic downturn and the allocation of US$8.3 billion by Congress to combat the threat in the US; and

• IMF Managing Director Kristalina Georgieva’s report that one-third of the IMF’s 189 members are directly affected by the virus and that “under any scenario, global growth in 2020 will drop below last year’s level”.

Government’s information shop also helped to seal the deal. It reported that the Minister of Finance & Public Service Dr Nigel Clarke told members of the Standing Finance Committee of the House of Representatives that “Government has contingency provisions within the Budget to adequately deal with COVID-19’s onset, should this occur”. He also said the Bank of Jamaica, which has net international reserves totalling US$3.16 billion, had the resources and the capacity to respond, should the need arise.

On Thursday, I learnt that the World Bank earmarked a loan package of up to US$12 billion in “immediate support to assist countries coping with the health and economic impacts of the outbreak.”

Complex risks

The coronavirus is one outstanding example of what last week’s article referred to as “the complex risk issues facing societies like ours” and the global community. How the direct costs and expenses associated with the management of these risks are to be funded was the subject of Dr Clarke’s statement to the House Committee and the World Bank’s loan package.

The US National Association of Insurance Commissioners is a group representing state insurance regulators. It said the Centers for Disease Control and Prevention, CDC, defines a pandemic as “the sudden outbreak of infectious disease spread over several countries or continents, affecting many people. Pandemics have the potential to affect all industries and could potentially affect insurers' operations and various lines of business across all insurance sectors. Pandemics can also disrupt financial markets, potentially impacting insurers' investments. However, unlike losses from weather-related catastrophes, losses from pandemics do not come from the destruction of physical structures.”

It is unclear at this point how and in what way COVID-19 is likely to affect local insurers.

Can the insurance industry be involved in providing coverage against the costs associated with the financing of pandemics like the coronavirus?

Consider these extracts from a panel of experts at a National Academies of Sciences Workshop on Pandemic Financing in 2016:

• Finance ministers are interested in the direct and indirect costs an outbreak could draw from their national budgets. The ability to quantify these costs is essential to properly finance them;

• The cost-to-benefit analysis for paying premiums on disaster insurance involves not only the financial cost of the premium but the political cost of explaining the value of the expense to politicians. Insurance payouts never cover all the expenses incurred in a disaster, further increasing the political cost;

• Insurance is not a single product, but a way of quantifying risk. Risk analytics make abstract problems more concrete and solvable;

• Insurance companies’ claims adjustment process is administratively complicated and expensive. Parametric insurance pays a set sum against a discrete trigger, reducing the insurers’ administrative burden;

• Through the process of risk modelling, insurance quantifies and draws attention to the risks of an outbreak, encouraging governments and businesses to develop contingency plans;

• Historical examples help insurance companies price risk, but there are only three or four pandemics in the past century on which to base models. Parametric insurance provides a simple way around the uncertainty in pandemic risk, but only better understanding and quantifying the risk can give proper clarity to the trigger;

• Without appropriate measures to reduce or transfer risk, the losses can only increase, making pandemic risk unattractive to any insurer;

• In general, banking products back the creditworthiness of the borrower; insurance products back the cost of the risk. Securitising a loan is difficult if the recipient is not creditworthy, but insurance simplifies the question to one risk and risk reduction;

• It is difficult to ask governments to pay premiums to hedge risks against shocks like pandemics; and

• Having donors pay insurance premiums obscures the useful link between the price of the premium and the strength of the preparedness system

The Catholic Church has been in existence for over 2,000 years. It has survived many pandemics. Despite the wisdom it has acquired over two millennia, it appears now to be relying on the ‘preparedness system’ to combat the threats of the coronavirus.

This approach has implications for us as citizens, business operators of all types and members of groups and institutions. There is no silver bullet.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com