Pandemic risk bigger than reinsurance & ILS markets alone: Schultz, Aon

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Pandemic risk insurance and reinsurance needs a new paradigm of how we access capital markets for risk bearing capacity, as it is bigger than just the reinsurance and insurance-linked securities (ILS) markets we know of today.

paul-schultz-aon-securitiesThe capital markets will need to play a role and that’s much broader than just the alternative reinsurance capital markets that has been tapped into by the industry to-date, Paul Schultz, CEO of Aon Securities explained recently.

“I would say that the capital market is going to play a role, and I’m saying capital markets more broadly than just ILS,” Schultz said in response to a question at a recent virtual media briefing held by Aon Reinsurance Solutions.

“In ILS, mortality risk is still very interesting to investors and that mortality risk would include pandemic, so there will always be capacity, in that sense.

“But when we look at potential solutions, at a kind of sovereign or state level, when we look at potential solutions more broadly in that scope, we’re going to see the capital markets participate outside of ILS too,” he said.

“I think that’s truly exciting when we think about the potential for bringing the technology and the intellectual capital, and everything that this industry does so well, bring it all to bear so that we can create solutions more broadly, than what ILS or reinsurance capital would do on its own,” Schultz explained.

“I think the need for the capital markets and the size of the capital markets, compared to the size of the reinsurance and alternative market, it’s just common sense that we’re going to need that capacity as well.”

Colin Dutkiewicz, Global Head of Life at Aon Reinsurance Solutions, explained some of the challenges in securing capacity that is really needed to respond to pandemic risks.

He commented “The devils in the detail, right? There’s the need for the capacity, there’s the need for the solutions. But can we put it together in the right package?

“Now, if it’s a risk that the reinsurance market knows then the reinsurance market can write it. If they run out of capacity then we package it up in ILS, but with the same metric of determining what the trigger is, determining what the loss ratios are, those sort of things.”

“The problem we have with COVID-19 is what is that trigger? A lot of people ask, what is pandemic risk? Can we reinsure pandemic risk? But what do you actually mean by pandemic risk?,”  Dutkiewicz asked.

“If you mean life or health insurance pandemic risk, then we’ve got that model, we understand that, that’s relatively easy to do.

“But if you mean the knock on risk of lockdowns and non-pharmaceutical interventions and social behaviour, it becomes very difficult to come up with a valid time-series of data that a capital market investor can get themselves comfortable with, that it is objective and not manipulatable and all these sort of things.”

This is a challenge he said, but one that Aon is working on.

“We are busy solving that devil in the detail at the moment and then the capital market will come fully on-stream to support those risks, which is definitely necessary.”

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