A survey by Munich Re U.S. Life, a division of global reinsurer Munich Re, reveals that most life insurers expect the frequency and severity of pandemics to increase over the next decade, an area where reinsurance and capital markets’ solutions and capital can play an important role.
Of the 100 plus life insurance underwriters that participated in the recent survey by reinsurance firm Munich Re, the majority (70%) expect that epidemics and pandemics will increase in both severity and frequency over the next five to 10 years.
Pandemic outbreaks such as the Ebola crisis in 2015, and the spread of the Zika virus in South America, along with other, potential known and unknown infectious disease outbreaks, pose a very real threat to global resilience and financial stability.
In fact, a report at the beginning of 2016 claimed that annual expected losses from potential pandemic risks’ top $60 billion, which, combined with recent discussions and movements from the World Bank, and results from surveys such as Munich Re’s, underlines the importance of risk transfer to tackle the exposures of epidemics.
The inherent unpredictability, and ability of infectious disease outbreaks to spread rapidly, makes an epidemic event extremely dangerous to economies and individuals, exacerbated by the fact that typically, such pandemics occur in poorer parts of the world that lack life insurance protection.
However, according to 34% of survey responses, recent epidemics such as Zika and Ebola has actually increased demand for life insurance purchases, while 64% felt that these events had no material impact on product demand.
“We are seeing a real interest in increasing access to life insurance products. I think that future accessibility of life insurance will be governed by new technologies and processes that will make issuing policies a quicker and easier process,” said Bill Moore, Vice President, Underwriting and Medical, at Munich American Reassurance Company.
Ultimately, if a region with insufficient, or inadequate insurance penetration experiences a serious pandemic outbreak, the impacted economies must rely on local, international, and often foreign governments to assist with financial aid and recovery. This can be very detrimental to the affected area’s economic and financial stability, particularly for developing parts of the world that lack sophisticated risk transfer markets, which can be seen to drive insurance penetration.
In an effort to boost global resilience and financial stability against pandemic outbreaks, and importantly, to enable rapid response in the forms of capital and aid to affected areas, the World Bank recently announced the launch of the Pandemic Emergency Financing Facility (PEF).
The PEF recognises that the potential loss to individuals and economies from pandemics is enormous, and recent history shows that immediate response is essential in order to save lives and better protect economic and financial growth, once an outbreak occurs.
Whether $60 billion annually is accurate or not, it’s clear that global organisations are increasingly understanding how vast the potential exposure is, underlining the need for risk transfer solutions from more traditional (insurers and reinsurers), and alternative (capital markets) sources.
The PEF, which is the world’s first-ever insurance market for pandemic risks, will utilise an insurance window that will be backed by reinsurance market capital and also pandemic catastrophe bonds.
Catastrophe bonds have been linked to pandemic outbreaks in the past, but this has been to cover extreme mortality risks as a result of terror events, large natural catastrophes, and pandemic outbreaks, deals like the $100 million Vita Capital VI Limited (Series 2015-1), are an example of this.
However, the World Bank pandemic cat bonds will be designed to payout based on parametric factors linked to the emergence and spread of an outbreak, enabling rapid payout of funds to the people who need it the most when a pandemic outbreak occurs.
Advanced technology and continued research is enabling insurers, reinsurers, ILS players, and non-insurance organisations from both the public and private sector to better understand pandemic risks. And as new solutions such as pandemic cat bonds, the PEF, and beyond, like AXIS’ innovative pandemic business interruption insurance product, continue to evolve, the ability to respond to epidemics will surely improve.
Perhaps owing to efforts of the World Bank and some of the large insurers and reinsurers to better finance and protect economies against pandemic and epidemic outbreaks, 91% of survey respondents feel that it will only get easier for consumers to obtain adequate protection at affordable rates within the next five to 10 years.
So while the threat of pandemic outbreaks is believed to be on the rise, meaning that more lives will be at risk and greater capital required to rebuild economies, insurance, reinsurance, and ILS capacity and solutions look set to increase global resilience, and ensure adequate funds are available when a pandemic outbreak occurs.