Lloyd’s pitches pandemic/systemic risk solutions, with capital markets support

Lloyd’s of London, the specialist insurance and reinsurance marketplace, has this morning pitched three possible solutions to pandemic and systemic risk insurance provision, as it seeks to bring constructive discussion to the issues of insurability of pandemic risk exposure and other major systemic risks.

As ever, the capital markets are seen as an important piece of the puzzle, with Lloyd’s calling for the global insurance and reinsurance market to work with the capital markets to bring significant capacity to the problem of risks deemed uninsurable in some quarters.

Lloyd’s has published details of three open-source frameworks for risk transfer that could be applied to problems like future pandemics and systemic risks.

The aim is to put the insurance and reinsurance industry at the forefront of protecting society against these enormous risks, with Lloyd’s noting that effective use of risk transfer could help insurance to ” fast-track global economic and societal recovery from the far-reaching impacts of COVID-19.”

Lloyd’s said the three open-source frameworks will help the industry to, “build future resilience through innovative partnerships and products together with a Centre of Excellence to better understand, model and provide insurance for systemic catastrophic events.”

Lloyd’s has developed the frameworks with the support of its UK and Global Advisory Groups, which are made up of industry leaders and luminaries from across the insurance and reinsurance world.

The work saw executives and experts interviewed, with the results being pulled together into three proposals for risk sharing, pooling and ultimately transfer of peak systemic exposures, such as pandemic risks.

The proposals take into account the insurance support required for the reopening of businesses in the wake of the pandemic, as well as supply chain resilience, plus how to prepare the economy to be even more robust in the face of future pandemics or systemic risks.

Lloyd’s work explains that there is an opportunity to leverage insurance-linked securities (ILS) capacity and investor appetite in bringing new solutions to pandemic exposure, as well as to other systemic risks.

“The global (re)insurance industry has an opportunity to work with the capital markets and to access their capacity to offer parametric protection for pandemics and non-damage business interruption through structures such as pandemic catastrophe bonds,” the paper explains.

Adding that, “Initial research suggests capital market participants may have the appetite to underwrite products that offer protection against future pandemics; at the same time customer demand has increased significantly.”

The frameworks are being made freely available for use around the world.

Two are focused on government and re/insurance industry partnerships, while the first is more focused on a UK industry solution to business interruption channelled through Lloyd’s itself.

ReStart and Recover Re are focused on providing protection for further waves of Covid-19, while Black Swan Re is a facility designed to support resilience on the face of future systemic risk events, including pandemics.

Lloyd’s describes the three frameworks:

ReStart, a potential non-damage business interruption solution (loss of revenue without a physical damage trigger)~ for future waves of COVID-19 being developed by the Lloyd’s market, specifically focuses on supporting SMEs. The solution is focused on giving certainty of non-damage business interruption coverage initially to UK SMEs by pooling limited capacity across a number of Lloyd’s market participants. The product would support SMEs reopening, offering a range of limits that ensure it is affordable for customers, without requiring any government support.

Recover Re sets out a proposed ‘after the event’ insurance product framework, that could provide immediate relief and cover for non-damage business interruption over the long-term, including the current COVID-19 pandemic. If implemented, this could be an efficient way to inject commercial and government funds into the economy, providing relief to customers with limited borrowing capacity. This framework could be implemented in any country where the government has the resources and industry commitment to support it.

Black Swan Re is a reinsurance framework for government and industry partnership that could better protect customers from the devastating and long-term impacts of systemic catastrophic events – from another pandemic, or global supply chain disruption, to the interruption of critical infrastructure or utilities. The framework would provide reinsurance for commercial non-damage business interruption cover for black swan events through industry pooled capital, backed by a government guarantee to pay out if ever the pool had insufficient funds.

Lloyd’s is also establishing a a Centre of Excellence supported by up to £15m in seed capital investment, to help build resource and capability to create products targeted on systemic risks, including pandemics.

Lloyd’s Innovation Lab will work with some insurtechs that can provide capabilities to the Centre of Excellence, and is exploring the application of an epidemic tracker for evaluating and underwriting pandemic risk, as well as other risk transfer solutions to help close the insurance gap for systemic risks.

Lloyd’s Product Innovation Facility is also involved, focused on product development to respond to an accelerated shift towards intangible-driven business models in response to COVID-19, the market explained.

Lloyd’s Chairman, Bruce Carnegie-Brown, commented on this work, “The purpose of insurance is to help businesses and communities manage the risks they face, enable them to recover quickly from disasters by paying claims, and provide the security that allows them to innovate, develop and drive economic growth.

“COVID-19 has demonstrated that there is much more we can do to support our customers by providing protection for the changing risks they face. Some of these risks are of a scale that require partnership with governments globally and this report identifies ways in which the insurance industry could work with governments to share risk and create a braver, more resilient world.”

Parametric risk transfer features as a mechanism within the frameworks, particularly for the Black Swan Re facility that would be focused on a broad range of systemic risks.

There is also the desire to introduce the capital markets to facilities, such as Black Swan Re, to ensure capacity is deep and broadly sourced to protect against these enormous and challenging societal risks.

Lloyd’s framework paper also notes the importance of keeping the resulting risk pools attractive to capital market investors, in order to ensure there is an option for ceding risk more broadly than just within re/insurance markets.

There is also a discussion of where risk should sit and whether structures that are off-balance sheet should be explored, so that re/insurers are not over-exposed to systemic threats, another area where the capital markets could provide support, as too could insurance-linked securities (ILS) structures.

The frameworks will provide useful places for specific product design to begin and it’s encouraging to see the capital markets considered at least.

However, not everything is insurable when it comes to these peak black swan type systemic exposures and Lloyd’s paper sensibly proclaims that, “While the capital markets provide an opportunity for expansion of commercial capital to support these risks, government partnerships are required for cover at a national level.”