TotusRe proposes multi-peril & pandemic public/private risk transfer structure

TotusRe is proposing the use of a cell insurance structure, alongside public and private market participation and the use of retrocessional reinsurance, as a solution to cover multiple risks of national importance, including pandemics.

TotusRe has been borne out of the collaboration of Liz Foster, Non-Executive Director of The Society of Insurance Broking, and James York, Founder at Innovative Risk.

The pair want to see a more innovative solution to the peak risks society faces, pulling together all stakeholders including government and industry to achieve a sustainable approach to insurance and reinsurance for risks including pandemics, climate exposure, flooding and terrorism.

Non-profit in its nature, TotusRe aims to get people discussing innovative risk transfer and financing solutions, while also avoiding talking about risks as uninsurable, something being seen with other proposed solutions to pandemic risk.

UK based, the goal is to close protection gaps that affect businesses in the country and the ability of its insurance and reinsurance industry to provide protection.

TotusRe proposes the use of a cell insurance structure, with TotusRe in the centre and each peril attached via its own cell.

Looking to the UK’s National Risk Register for inspiration on what perils to include, TotusRe has already identified the risks of pandemic, terrorism, flood, Cyber and climate to begin, but suggests more are added as warranted, likely from the risks designated as a category “red” threat to the UK in the Register.

TotusRe aims to create a fund that can support the insurance industry and the government in providing the protection businesses need, also removing the UK Government from the scenario of finding itself as the insurer off last resort , but with no source of revenue for the endeavour.

Co-Founder Liz Foster commented, “As UK business look to re-establish a version of normal, we want to make sure they are adequately supported by the insurance industry to allow them the confidence to get back on track.

“My request to professional bodies is to please use the powerful voice of your organisation to call upon the Chancellor to agree the TotusRe model, and thus support UK businesses as they move forward from COVID 19.”

TotusRe’s collective highlights the fact two successful UK risk pooling and reinsurance support structures, Pool Re for terrorism and Flood Re for flood risk, were both created retrospectively.

They propose something more proactive or pre-emptive, creating a solution that can provide immediate benefits, but also grow to protect more as risk levels rise.

“We cannot waste any more time in developing a proactive solution before individuals and businesses find themselves at best unable to afford business interruption insurance, and at worst that the market will not provide such insurance,” the collective effort says.

TotusRe would provide a single source of insurance, “with no ambiguity of policy wording or intent,” they explained, with cover expected to continue even after an event which triggers payments.

Funding for TotusRe would come from policy holder contributions, insurer contributions, reinsurance and retrocession, while the Government would be expected to provide a guarantee to pick up losses which the cell cannot meet.

It’s an interesting proposal and while in the early days of its discussion, worthy of some attention we believe.

There is a lot to be said for creating segregation between these peak perils, but at the same time enabling them to come together for reinsurance and retrocession purposes, to benefit from diversification within the pool and economies of scale.

The structure would also lend itself to finding ways to draw in capital market sources of funding perhaps, as insurance-linked securities (ILS) funds and investors may be attracted to elements of the risk and be willing to step up as a source of retrocession for TotusRe.

In addition, TotusRe could issue catastrophe bonds or other ILS to transfer layers of its risk, while it could also set up additional cells to act as sidecars to support the individual perils, of the centre and diversified cell that would be TotusRe itself.

These are early thoughts, for what is an early stage initiative, but it does seem like an idea worth exploring further, as innovative risk transfer structures and tools, with both public and private participation, could present viable solutions for providing capital and loss buffers against the kind of systemic risks that countries face.