Pandemic protection. Is it included, excluded, or even mentioned in a policy or program? Even if it is, is the coverage responsive enough to really help the protection buyer, or should parametric solutions be looked at? If so, how to ensure they are robust?
At a time when interest in pandemic insurance, reinsurance and retrocessional protection is understandably at an all-time high due to the ongoing coronavirus outbreak, but the price of coverage has skyrocketed, it’s appropriate to look to more modern risk transfer solutions and consider whether there are better ways to achieve more robust coverage.
We spoke with Tom Johansmeyer, Head of PCS (part of Verisk) to discuss the parametric risk transfer opportunity in pandemics and why robust data & reporting on parametric pandemic triggers is vital.
1. How much demand are you seeing for parametric pandemic coverage?
We’re looking at parametric pandemic reporting agency issues because we believe that demand for such protection will continue grow. And in some future scenarios, such protection could be an important hedge on a variety of outcomes – from asset-side impairment to retrocession on particular lines of business.
Working from the perspective that traditional indemnity retro in the catastrophe market was already in short supply ahead of COVID-19 – coupled with the more recent impacts of the pandemic – it’s easy to see how capacity challenges could arise later in the year. Any thinking about parametric pandemic hedging should probably begin soon, and that’s a lot to ask given that we’re coming up on the reinsurance renewal for Japan, with Florida and mid-year right behind it.
2. How many trigger solutions are there and how robust are they right now?
From what I’ve seen and heard, most parametric triggers rely on authoritative data sources such as the WHO or CDC. And they are great places to start, especially when there’s a paucity of historical information. And to be frank, it’s becoming clear that the last realistic reference event was in 1918. So, it’s important that, as we navigate the difficult and tragic human circumstances associated with COVID-19, we also make sure we learn as much as we can. If the next comparable event isn’t for several decades (or ten, if we use 1918 as a reference point), then future generations could literally depend on the lessons of today.
With this in mind, the PCS team has been focused on several issues associated with COVID-19 data reporting. Among them has been data aggregation. We’ve evaluated confirmed case reports from several countries, including the United States, Germany, United Kingdom, France, Canada, Spain, and Switzerland. Among the most important observations the team has made involves the flow of data. We’ve seen inconsistencies between different WHO reporting outlets, inconsistencies between the WHO and national and regional reporting agencies (such as CDC, ECDC, Public Health England, and Sante publique France), differences in reporting attributable to publication schedules, differences in reporting likely driven by backlogs of tests or even just workload for the folks who post the data online. We’ve also seen news outlets occasionally outpace national reporting agencies by reporting based on reviews of state and local health agency reports.
In going through this exercise, we’ve seen where traditional approaches to parametric pandemic triggers could fall short. If you use WHO data, for example, it’s probably best to specify a link, page, or report name. You should probably be aware – with any national, regional, or international reporting agency – of whether they update on weekends (or adjust wordings to pick up the last number on the Monday or – better – Tuesday following the weekend). Rates of under-reporting, political issues, and are probably anticipated during analytical exercises, but the mechanics of informal reporting agents in parametrics never get enough attention. It’s not inconceivable – especially for a politicized event that’s also seeing a backlog in testing and rapid rates of infection – that the WHO could have multiple numbers, the CDC could be higher, and an aggregation of state and local health agencies could be significantly higher again. This isn’t a hypothetical. We’re still in the early days of COVID-19 and have seen clear examples of this.
To be fair, the problem isn’t with the reporting agents – especially if they don’t know that they are being sued as such. For anyone using informal or public sources of information in a parametric trigger, they should understand thoroughly the underlying data reporting issues and have mechanisms to address any gaps. Or, they should engage an independent third party to play that role. We’ve just seen too many odd gaps due to operations and other frictional factors.
3. What do cedents and markets need to consider when structuring such a deal?
The easiest solution is to engage an independent party to aggregate data from credible sources and just go with their estimates. For example, you may have the WHO for the United States at X, the CDC at 1.5X, CNN reporting a tally of state and local health agencies at 2X, and a webscraper at 2.6X. The independent loss reporting agent would then dig through the data sources that CNN cites, for example, checking the local and state agency disclosures and seeing if they match the reported number. The loss reporting agent would also review the methodology and sources picked up by the webscraper. If CNN were to have relied too heavily on anonymous sources and the webscraper on dubious websites that didn’t exist three weeks ago, then the loss reporting agent would probably stick to the CDC (depending on an analysis of publishing cycles and other operational issues mentioned earlier). Or, if the webscraper was just doing a timely job of pulling from globally recognized reporting authorities, the reporting agent would confirm its validity, identifying that it’s just ahead of the likes of the CDC and WHO (again, not a hypothetical for us).
For bespoke transactions, or those where the parties want to do it themselves, they should contemplate the following:
- Test availability can be a challenge, which can result in pent up cases that show as significant upward increases. When the “release” of such backlog coincides with a weekend, it can lead to significantly delayed reporting.
- The lag from backlogs can also be exacerbated by workload issues among resources in agencies whose job it is to collect and post data online. When there are more pressing day-to-day issues, it’s easy to leave the “web task” until tomorrow. This can affect reporting timeframes.
- The acceptance of downstream data (e.g., state and local health agencies) by upstream bodies (e.g., CDC) can lead to lags. The problem here is that there can be two conflicting numbers in the market, which can lead to disputes for an agreement.
- Be as specific as possible when referring to data sources. Website section names, page names, and even links can make a profound difference.
- Political factors can add friction to the data supply chain. Even if political factors don’t influence the data itself, they can influence how fast data moves. Slow-moving data can lead to basis risk if a cover expires before an update has been fully communicated to the end reporting agent.
I can’t emphasize the importance of specificity enough. It’s conflicting data from the same service that actually led the PCS team to start examining issues around pandemic parametric reporting.
4. Why is independent reporting important?
In general, when the parties to a transaction are involved in reporting, the risks of inaccurate or inappropriate reporting are just too high. Even an organization that is above reproach could wind up looking bad because of a close call – even if everything is clean and correct. I’ve always joked that independent reporting agents exist to provide someone to scream at. The more serious version of that answer is that we provide accountability. An independent reporting agent needs to be able to demonstrate and explain without compromising integrity or accuracy.
Not a parametric example, but the market learned this with Jebi in 2018. With informal reporting agents, you get no methodology, no sense of how various situations can be handled, and no accountability. And you shouldn’t. Informal reporting agents don’t volunteer for the role, and they may not be equipped for it.
Ultimately, our clients know that if they have a question or a concern, they can call us. And they do call – not to get the answer they want, but to get the answer that’s correct and consistent with our processes.
5. Could parametric solutions be used for insurance, reinsurance, retro?
We see applications up and down the risk and capital supply chain – so yes on insurance, reinsurance, and retro. We also see some value in parametric solutions as a more generic hedge on broader economic conditions. If capacity is hard to come by – be it traditional, ILW, or even parametric cat – then risk-bearers may at least be able to get some form of protection via pandemic parametric, essentially hedging the cause of some potential future economic malaise. Right now, having more alternatives is likely better.
6. What is PCS looking at in this area?
Right now, we aren’t doing anything except helping the market better understand a potential problem in parametric pandemic cover. We were looking at data in the earlier stages of COVID-19 developing in the United States and saw some inconsistencies. So, we started keeping track of it. This is outside the context of any catastrophe bulletins or products we have. PCS has not designated COVID-19 a catastrophe, and we would only do so if it meets our criteria.
We saw the need for some explanation and analysis and have decided to use the opportunity to learn – and to help our clients learn. As I mentioned earlier, our market hasn’t had a learning opportunity like this in a century, and I believe we have a certain obligation to future generations. PCS has been around for 70 years. In 2090, we’ll probably be forgotten, but we want to make sure whoever’s at the helm then will be better equipped than we are today. And I hope the future crew will feel the same sense of commitment and pride that we do today.