The participation of the capital markets in financing the world’s most pressing risks is an important source of capacity and investors could support up to $2 billion of capacity to back pandemic catastrophe bonds, Hannover Re CEO Jean-Jacques Henchoz explained in a recent interview.
Speaking to Swiss, German-language newspaper Neue Zürcher Zeitung, Henchoz explained the important role that insurance-linked securities (ILS) capacity could play in providing the risk capacity and reinsurance needed to help the world finance its peak risk exposures.
The Covid-19 pandemic is the focus of the interview, with Henchoz explaining how it impacted his firm, global reinsurance player Hannover Re, as well as his view on how governments around the world have responded to coronavirus outbreaks and how best to respond, in terms of establishing risk bearing capacity and facilities for pandemic insurance coverage.
Henchoz explained that even for a large reinsurance firm like Hannover Re, the challenge is in diversifying away pandemic exposures, given they correlate across areas of its business on both the underwriting and investment side.
Meaning that support is required from other sources to help the insurance and reinsurance industry in covering pandemic risks, in Henchoz’s view.
“We see encouraging debates between governments and representatives of the insurance industry. Partnerships between the state and the private sector are necessary,” Henchoz explained to the newspaper.
State backed facilities for risks like pandemics are “necessary” Henchoz said, adding that compulsory pandemic insurance is another possible angle to better protect businesses and consumers.
Part of the problem though is the scale of the exposure and the fact pandemics span countries and can affect the entire globe, as seen with Covid-19.
The majority of initiatives to create state backed insurance for pandemics are nation based, but a certain level of coordination would be desirable, Henchoz explained.
The fact you have different national objectives and regulatory environments makes it a challenge for global insurance and reinsurance companies to assist in the level of response that is really required, to global threats such as pandemics.
Asked about the World Bank’s pandemic catastrophe bonds, which responded and paid out due to the global spread of the coronavirus, Henchoz explained that the ILS market has a role to play.
“Capital market solutions are part of the answer to bearing large risks,” Henchoz said, adding that “But private investors’ capital and risk appetite for new global pandemic coverage are very limited.”
However, “At the moment, the capital market could potentially fund $2 billion in pandemic bond risks,” he explained, which is a reasonable amount, although far short of the capacity that has been pumped into economies in response to the pandemic.
Henchoz also said, “With its bond, the World Bank primarily provided capital for emerging countries with acute financial difficulties. It is a very good thing, for all of us, if we have capital available to fight an epidemic like Ebola in West Africa. The insurance industry worked well with the World Bank.”
Moving forwards, Henchoz believes governments and industry need to work fast to establish facilities and risk transfer capabilities while awareness of pandemic risk is particularly high.
“After a major natural disaster, such as an earthquake, acceptance is initially huge. But experience has shown that interest wanes quickly,” Henchoz said.
It requires political engagement and will take a few years, Henchoz noted saying that political acceptance of any proposed solutions is critical.
It’s encouraging that the CEO of one of the world’s largest reinsurers sees the need for capital markets support on pandemic risk and the role that catastrophe bond like instruments can play.