IIG News

IIG Insights: Epidemic Risk Insurance – Challenges, Products and Market Development

Darryl Grater, President of the IIG welcomed everyone and briefly introduced this most topical session sponsored by Munich Re. Sars, Mers, Ebola, and now Covid-19 has placed businesses in a rapidly declining economic situation. Future pandemics are expected to be more severe and therefore it is critical that we develop an Epidemic/Pandemic structured risk solution. Darryl also reminded all that this is a CPD accredited session which can be secured via the IIG CPD Vault on the IIG website.

Our speakers for the day

Leigh Hall (Head of Origination Epidemic Risk Solutions London). Leigh is a member of the Chartered Institute of Management Accountants (CIMA). He has a B.A. Hons in Economics and gained an MBA from Cass Business School, London.

Dr Gunther Kraut (Head of Epidemic Risk Solutions Singapore & Munich). Dr Kraut holds a diploma degree in financial mathematics from the Technical University of Munich as well as a business degree from LMU Munich. He also has a PhD in risk and insurance with a research focus on extreme mortality risks such as pandemics.

Gunther started the session and shared that the intention is to travel across Africa informing everyone of the various product developments Munich Re has been involved with. Munich Re is a leading reinsurance company and has a local presence in Johannesburg, South Africa. The broader group which comprises of epidemic risk insurance requires a slightly different skills set to a regular reinsurance company.

Epidemic Risk Solutions (ERS) Team based in London, Munich & Singapore believe a global approach is required to diversify regional events. The team is not only geographically diverse, but as well as in their expertise. They have created new wordings for epidemic risk and the team also includes an epidemiologist. Hopefully, step by step epidemic risks become more insurable.

Munich Re has a global mandate but also across public sector insurance as well. The reinsurer acts as an important transformer with the biggest challenge being, accumulation risk. Munich Re, however does have a history of dealing with pandemic risks.

ERS business model straddles: life, non-life & the public sector

ERS is responsible for:

  • Viral epidemic/pandemic outbreaks,
  • BI & CBI losses,
  • Worldwide and regional covers,

Leigh then explained why ERS is labelled epidemic rather than pandemic. The strategy is to create a diverse book of business and ERS is associated with epidemics including business interruption, temporary site closure and prevention services. Coverage is indemnity based but can be triggered parametrically. This is a stand-alone cover. The Model is quite specific and warranted a special discipline. Epidemics are risks that are increasing more frequently due to biological, environmental and lifestyle changes, among others.

ERS is often assumed to be unpredictable, unavoidable & uninsurable. Munich Re is at the forefront to demonstrate that this risk is insurable. Product have been highly adaptable to the evolving scenario.

Gunther briefly unpacked the product design which includes using all tools to get a better grasp of the risk which is mostly geared towards Life and this needs to translate to non-life losses.

How the cover works?

+epidemic outbreaks +economic loss = indemnity based pay-out

+epidemic outbreaks + additional triggers breached = parametric pay-out

Increasing availability of data enables adequate risk understanding and assessment. Modelling parameters need to capture frequency and severity of epidemic outbreaks and economic losses.

Accumulation risk reflects the efficiency of policy structure under the pandemic tail scenario which can require and additional pricing element.

Products:

  • Pandemic emergency financing facility (PEF)
  • Collaboration with WHO and other public and private sector partners
  • PEF covers the world’s poorest countries against pandemic outbreaks
  • PEF pays out when viruses reach a certain level of contagion (number of deaths, speed of disease spread etc.)

COVID-19 – PEF is paying out:

  • PEF got triggered on 31st March, almost the earliest time possible
  • PEF makes it possible for developing countries to receive financial support
  • Will be important to monitor how funds provided will be used effectively in developing countries.

There are three epidemic triggers:

  • Epidemic (viral outbreak),
  • Economic,
  • Indemnification

Timeline of an outbreak:

  • First cases observed
  • Local transmission confirmed
  • PHEIC confirmed – Public Health Emergency of International Concern
  • Constant level of new cases
  • Civil authority lockdown confirmed
  • Settlement of claim

Leigh then touch on the importance of Market Development. Covid-19 has accelerated the activities of a developing market. Munich Re wants to create a market as the intention is to be a catalyst and enable a bigger market. Their aim is to make societies more resilient against the consequences of an epidemic outbreak by engaging with development banks, clients, brokers, lenders and borrowers on the importance of epidemic risk transfer solutions.

Market reaction:

  • Litigation
  • Market pullback of “infectious disease” or “communicable disease” even tighter language, absolute exclusions, reduced capacities
  • Global interest
  • Increased private sector demand, but for differing reasons
  • Public sector increasingly interested in transferring risk to private sector

Munich Re cannot address this alone and want local domestic insurance to participate alongside them to create a geographical spread and build a diversified book. Africa and South Africa is a very important geographical cluster.  Munich Re wants to play a role in informing and educating on underwriting in developing the product, but also to build capacity in the Cat Bond market. The aim is to also create an investment product for the investment community which can form an important part of an investor’s portfolio and to transform and create an attractive proposition. This mobilisation would create as much capacity as possible.

The presentation was concluded and Darryl allowed for a few questions to be entertained. One question being around the unreliable data that many countries produce and what sort of checks are in place to address this.  Gunther confirmed that Insurers only use official and public data and do not generate their own statistics. Pay out occurs during the early stages whereby a small supplement is released when there are no fatalities and thereafter slowly unlock a sliding scale of pay out.

Leigh emphasized that it is in Munich Re’s interest to develop a dialogue and promise to return to South Africa as soon as it becomes possible.  Darryl thanked Munch Re and the speakers and encouraged attendees to reach out directly to Munich Re with any further technical enquiries.

 By: Asiya Swaleh

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