The pandemic, and the subsequent fallout for insurers, has shown the industry two things: high value, high risk claims are no longer the ‘unexpected’; and a more efficient model is needed to assess the payout for catastrophe claims. Here, Rachel Hillier and Tara Swaminathan ask: are traditional models of insurance still the most suitable, or is now really the time for change?
Providing cover for pandemics, or any other high risk, high value claims, are an old-age problem for the insurance industry. Whilst some insurers learnt lessons from the SARS outbreak in 2003, the solution was to exclude cover, or to ‘price-out’ any standalone cover that did exist, so that only the brave and cash rich took out the cover. The high premium attached to specialist ‘pandemic insurance’ is hardly surprising, given the nature of an indemnity insurance policy.
Although pandemics were noted in many insurers’ ‘risk registers’, it was not considered a likely threat in the West. In the UK, all risks business interruption policies have been found to be peppered with cover losses arising from closure of premises due to the presence of “notifiable diseases” or premises being shut down by public authorities due to “contamination”. It remains to be seen whether the UK courts will decide (in test cases bought by the Financial Conduct Authority) that the insurers’ cries of “we didn’t meant to cover this pandemic” will be accepted, or whether a massive payout will be required under these policies.
Covid-19 has raised, and continues to raise, questions about the traditional approach to insurance cover. Can insurers afford to “indemnify” (put someone back in the financial position they would have been but for the insured event) policyholders against a pandemic which will continue to threaten businesses with closure and for which there is no known cure?
Claims under business interruption insurance policies have made headlines recently, with insurers being accused of not providing adequate cover, unfairly rejecting claims, and the delays, oh the delays.
Business interruption insurance covering ‘pandemics’ under all risks insurance policies are likely to be a thing of the past. With tensions between businesses and the insurance industry on the rise, what can be done to offer businesses some protection at a premium they can afford, without emptying insurers’ reserves?
Pandemic Re, launched in April 2020 as a public/private steering group, has followed the Flood Re (flood victims) and Pool Re (terrorist victims) approach, and is seen as a viable solution to overcome future pandemic risks. It is a collaboration between the UK Government and the industry, where – if you qualify for the scheme – resources are pooled together for a collective response to a particular catastrophe. Grants (usually of a fixed small amount) are paid to those suffering the identified risk.
However, there are issues with using this approach to cover loss due to pandemics. The groups are set up to compensate a small group of policyholders against one isolated catastrophe. Covid-19 is an international worldwide threat affecting millions of businesses across the world, and as flare ups of the virus seem likely to occur for years to come, the risk of closure to business is not isolated, and actually quite likely.
The traditional approach fails to capitalise on innovative technological solutions. A fresh look at the way that insurance works is required. Insurtechs have already provided some solutions based on parametrics. For example, UK Insurtech Floodflash makes payments at pre-agreed levels when a sensor in a business premises detects a flood at a certain level.
Parametric products are similar to financial modelling products, in the sense that they are driven by data. But unlike indemnity-based insurance, index-based thresholds are pre-set between the parties, with parameters triggering the mechanism for payout. Payments are usually fixed and pre-agreed according to the level of premium the insured wants to pay.
Under traditional models of insurance, insurers tend to hold large amounts of liquid assets in case they need to pay out for unquantifiable claims. Parametrics allow for a re-assessment of this approach, providing insurers with more certainty as to the quantum of claims.
Parametrics also lead to fast payouts and reduces transaction costs, the need for complex assessments of loss and damage, and takes away human analysis and error.
Payments do not necessarily reinstate loss in full, but this is pre-agreed. Using business interruption insurance as an example, if parametrics had been used to cover pandemics, payments would have been quick, automatic and sustainable. Such payments could be made automatically in small amounts for every day a business is shut due to Covid-19.
The impact that Covid-19 will have on pricing and coverage of insurance is still a relative unknown. Insurtechs see the opportunity this represents, and are developing technology to make customised, robust and agile solutions. Work continues on combining artificial intelligence and parametric models to better model and anticipate the risks, tailoring cover and pricing on a real time basis and to the specific needs of a specific business. This flexibility, combined with the speed in which payouts can be made, makes it an attractive alternative to traditional insurance cover.
It is time for insurers to embrace technology and to look to the Insurtech industry to provide solutions for affordable insurance against future pandemics and the ongoing risks presented by Covid-19.