An innovative new pandemic business interruption insurance product launched by insurance and reinsurance group AXIS, provides a very good example of how pandemic risk transfer could be structured in a manner suitable for the ILS market and its investors.
The new product launched by AXIS Healthcare yesterday is designed to provide medical catastrophe (“contagion”) business interruption insurance for U.S. and Canadian hospitals, to protect against a loss of revenue caused by the outbreak of a pandemic or contagious disease.
The product covers a wide range of potential pandemics and diseases, including any disease that can be transmitted by direct or indirect contact.
Therefore this includes bubonic plague, MRSA, Legionnaires’ Disease, Middle East Respiratory Syndrome (“MERS”), Hantavirus, SARS, West Nile Virus, HIV, Ebola Virus, Marburg Virus, Lassa Fever, Influenza, and Bird Flu, as well as other lesser-known viruses or plagues. The product would also cover losses due to new and undiscovered diseases, or a disease that has the potential to mutate into a pandemic at some point in the future.
So it’s a wide-ranging coverage including such high-profile diseases as Ebola, which of course has been discussed widely as requiring significant risk capital to insure countries in Africa against it. Those discussions have also involved the potential for catastrophe bonds, or other contingent risk financing and insurance or reinsurance products, something which the structure of AXIS’ new pandemic insurance demonstrates might just be feasible.
The new product, named AXIS Healthcare Medical Catastrophe Business Interruption and Extra Expense, is structured using four triggers, which could all be considered parametric triggers. For the policy to respond a contagion needs to result in just one of the triggers being breached.
The four triggers are:
- A governmental quarantine of a hospital;
- If 25% or more of the medical personnel do not come to work;
- A 25% or more reduction in inpatient stays; or
- A 25% or more reduction in emergency room visits.
These triggers are based on parameters which indicate a reduction or sudden slow-down of activity at a hospital, resulting in a loss of revenue and the need for coverage to respond or payout. The maximum length of the pandemic insurance coverage is limited to twelve months from the date the coverage is triggered.
Such triggers seem perfectly suitable for use in an insurance-linked security (ILS) transaction to cover pandemic business interruption risks, perhaps even a catastrophe bond. By narrowing down the exposure to align it with metrics, or parameters, that directly affect revenue, this insurance product has been cleverly designed to respond to the risk it covers, reducing basis risk to an absolute minimum, vital for any ILS covers for this type of risk.
Pandemics are covered in mortality catastrophe bonds, but they are based on mortality rates as measured on an index. Triggers like in the example of this insurance product, could enable a catastrophe bond, or other ILS transaction, to payout based on the BI impact and spread of a pandemic, or other contagion, which didn’t actually cause high levels of mortality.
That could enable ILS investors to open up a pipeline of new risk, risk which is modellable, reasonably understood and which is tied to specific parameters that mirror a risk of business interruption. Of course not every ILS or capital market investor would be interested in assuming pandemic BI risk, but this is a good example of how investors that were keen could access the risk through a parametric structure.
These triggers also provide a good example for how ILS or cat bonds could be structured to transfer the business interruption risk from natural catastrophes as well. By linking an event, which could be third-party defined and designated (as the contagion would be) to specific business metrics or parameters that indicate a revenue impact, a product to cover catastrophe BI could easily be structured with reduced basis risk.
That could be attractive to large corporates, transportation companies, cities, or other large corporate insurance buyers. Examples that come to mind could include a city or government buying protection from the capital markets against power outages caused by storms of a certain magnitude (a trigger based on homes without power for example). Or perhaps a large factory linking the occurrence of a storm or other weather catastrophe with reduced output over a certain period. Such triggered BI covers could be structured as derivatives, insurance or even as securitised cat bonds, we’d imagine.
Clearly these triggers are not suitable for broader coverage, such as the pandemic emergency financing facility discussions, which require much wider risks to be transferred. But even in that case, a country could have the outbreak of Ebola as a primary trigger and number of hospital admissions as secondary, before any protection would payout.
The triggers discussed here are also reminiscent of the recent parametric catastrophe bond Acorn Re Ltd. (Series 2015-1). The Acorn Re cat bond ultimately provides insurance protection to the Kaiser Permanente group of health plan companies for workers compensation claims from earthquakes.
Another interesting example of a similar trigger in a cat bond would be the California State Compensation Insurance Fund’s Golden State Re II Ltd. (Series 2014-1), which covered workers compensation claims resulting from California earthquakes.
It would surely be possible to derive triggers that provide business interruption coverage in a very similar way.
AXIS’ pandemic insurance is an innovative product, which it could likely take worldwide to other developed economies where hospitals risk shutdown should contagion break out. The product also provides AXIS with an interesting source of risk, which it can likely retain a good amount rather than seeking reinsurance for it all.
It’s a very good example of how innovative thinking can cover a risk related to a major event occurring, in this case a pandemic. Easily translatable to a catastrophe, or any other large event that threatens major corporate or sovereign revenue losses, we would suggest, and therefore potentially a suitable model for the ILS market to embrace.
Finally, this type of trigger, defined by the occurrence of an event and then specific business metrics, is also likely applicable to cyber insurance or reinsurance. A primary trigger could be a major hack attach, denial of service, loss of data, or other key cyber risk, with a secondary trigger being a business metric related to it.
Of course in order to structure any ILS or cat bond deal to cover similar BI risks, from pandemics, catastrophes or any other event, much more work on modelling, data analysis and finding the metrics or parameters that correlate with event severity would be required.
But, insurance, reinsurance and ILS players could leverage these triggers within their business, with the key being in reducing any basis risk, another area where this new product from AXIS innovates.
Cleverly, before AXIS will offer a quotation on this pandemic BI insurance product, a hospital has to work with the insurer on a pandemic preparedness assessment. This involves a professional healthcare risk manager, with skills in pandemic preparedness, assessing the quality of a hospital’s pandemic program.
That enables AXIS to really understand the risk its taking on and the likelihood of triggers being breached, allowing it to better define the pricing and rate-on-line for each contract and ultimately minimising the basis risk it takes on.
Commenting on the product launch, Peter Wilson, President of AXIS Insurance’s U.S. operations, said; “AXIS Healthcare’s medical catastrophe coverage represents an industry first, and we are pleased to be able to offer North American hospitals a new tool to safeguard their critical operations against pandemics and other disease outbreaks. The healthcare industry is an important market for AXIS Insurance, and we are committed to applying our specialty underwriting expertise, service capabilities, and capital strength to provide innovative and competitive solutions like this one.”
Kimber Lantry, Head of AXIS Healthcare, also said; “Our new Medical Catastrophe Business Interruption and Extra Expense coverage serves a critical need in the healthcare marketplace that has thus far gone unaddressed by the insurance industry. Pandemics represent an especially serious risk for healthcare providers. During the 2003 SARS outbreak, hospitals were identified as the source of the spread of infection, resulting in the partial or complete shutdown of three hospitals in Canada. Indeed, after the first Ebola patient was admitted to Texas Presbyterian Hospital in October of 2014, the hospital lost $20.3M in revenue over a two-month period, with a decline in inpatient days of 22% and a decline in ER visits of 49% during the first month.”