Parametric future pandemic capacity limited, but pricing higher: WTW

Capacity to support parametric pandemic risk transfer and insurance is expected to remain limited in the United States, according to broker Willis Towers Watson, but pricing has been on the rise.

The company explained that capacity for parametric insurance solutions to cover pandemic related commercial risks, such as loss of earnings, has been limited to around $100 million per-deal in 2021.

That seems a particularly small number given the amount of value-at-risk of pandemic related shut downs, but the insurance and reinsurance market has been particularly nervous about providing any pandemic coverage at all ever since the outbreak of the COVID-19 coronavirus.

In fact, most insurance and reinsurance contracts now see pandemic and communicable disease risks strictly excluded from them and the industry has spent the last year reducing its pandemic exposure through updates to contract terms and broad exclusions of any kind of exposure to government shutdown related risks.

It remains a challenge to find any significant level of coverage at all for the COVID-19 pandemic, with additional waves generally uncovered, although we are told by sources some niche and relatively small contracts do exist in the market, that provide specific elements of coverage related to future COVID waves.

However, the parametric risk transfer market has continued to provide an element of coverage for other future pandemics, with very bespoke and tailored contracts with triggers linked to multiple factors that describe a pandemic hit to a business.

Willis Towers Watson (WTW) explained that the parametric insurance market has been offering large corporates coverage for the specific and linked risks of lost revenue, lost gross profit or increased expenses from a non-COVID-19 pandemic event.

In general, these contracts require a dual-parametric trigger to be breached for a payout to come due.

WTW said that these dual-trigger pandemic risk transfers are based on a World Health Organization notice (PHEIC or pandemic) and something like a breach of a pre-agreed level of cases or deaths in particular geographies, or a civil authority action by a federal or state government in particular geographies.

The broker also said that, as an extension, these contracts can provide some COVID-19 related coverage, as they can, “help manage the cash-flow impact of a second wave of COVID-19 through a multiyear structured (pre/post loss funding) component (not risk transfer).”

On the capacity front, WTW isn’t expecting any dramatic resurgence, with the $100 million per-deal of available market capacity expected to remain steady through 2021.

Our sources suggest 2022 will not see a significant resurgence in available capacity, although data on the pandemic is improving and helping to make product construction simpler now.

Omicron has added a new level of uncertainty, we’re told, as some parametric products had looked at speed of transmission and case numbers, which we’re seeing to be elevated with this new variant of COVID-19.

That is likely to put off some capacity providers and drive a new push to attempt to construct more robust parametric pandemic triggers, that couldn’t be activated by a surging variant, especially if that variant did turn out to be technically less severe (on average).

The parametric market has other ways to provide coverage though, linking triggers to economic activity levels for example, to attempt to cover loss of earnings caused by pandemic related slowdowns in footfall and the like.

Combining triggers, such as the declaration of a pandemic emergency with a resultant drop in footfall, revenue, or sales, could be another way to provide a more robust parametric pandemic solution.

There would appear to be opportunities for innovation to help construct niche parametric pandemic coverages, but with these often having to be tailored to individual protection buyers they can also be costly.

Some markets have had some success, via a consultative route to discovering the real pain points a buyer may want coverage for and using diverse and multiple related or linked data sources from third-parties to create some type of protection, that responds when pandemic related impacts would occur.

However, Willis Towers Watson noted that markets are now being better compensated for taking on pandemic risk, with pricing having been driven higher by loss frequency and also as greater clarity emerges on COVID-19 related losses and legal action.