The COVID-19 pandemic has demonstrated the world’s vulnerability to infectious disease, which had been thought to be mostly a thing of the past. As the world moves towards a greatly uncertain post-recovery phase, experts have realized that it is only a matter of time until the next pandemic emerges, and that everyone must prepare.
According to Dr Gunther Kraut (pictured above), global head of epidemic risk solutions at Munich Re Group, what we think of as “after the pandemic” is the same time as “before the next pandemic,” which is why preparation is important, especially after seeing the economic impacts caused by COVID.
“Over the last decades, the frequency, severity and economic impact of events have increased, and will continue to increase, the need of a robust risk management plan before the next large-scale infectious disease outbreak is evident,” Kraut told Corporate Risk and Insurance. “Especially better mechanisms to increase resilience and preparedness – if there’s one lesson, then [it’s] that a paradigm shift for better preparedness is needed.”
The COVID-19 pandemic has been termed as a “black swan event,” but Kraut disagrees, instead calling it a “grey rhino event,” as coined by Michele Wucker – a highly probable, high-impact, yet neglected threat that is not random. Instead, it occurs after a series of warnings and visible evidence.
“Institutionalizing better risk management processes for epidemic and pandemic outbreaks is key, to protect staff, to protect the business, and – if you like – also out of fiduciary obligation,” Kraut said.
While awareness of pandemic risk is now at an all-time high, Kraut said that there are several important factors to consider for market developments in insurance – both on the supply and demand side.
“It is evident that the major challenge for insuring epidemic and pandemic risk is the global accumulation risk, i.e., the occurrence of losses across the globe at the same time,” he said. “As a consequence, commodity markets for traditional insurance products had no choice than to firmly exclude infectious disease cover from their terms and conditions. This has not been a new insight, but the rigor of implementing it has increased and there is no way back. This puts epidemic and pandemic insurance into the field of specialty covers, which enables a strict and transparent accumulation control for insurance providers.”
COVID-19 has created demand for several specialist insurance products, such as business interruption, extra expense or for event cancellation.
“However, on the demand side, affordability remains a key question,” Kraut said. “This is simply driven by the high expected loss from future epidemic and pandemic events. So, for corporates, the challenge is to develop an efficient risk management strategy which combines insurance with other tools of risk management.”
In general, Kraut has described the market as transitioning from heightened awareness to actively pursuing protection against the next major disease outbreak. Aside from providing cover for larger corporates, he said that Munich Re is now increasingly working with primary insurers to develop and launch selected and sustainable pandemic risk offerings.
Insurance against epidemic and pandemic risks
According to Kraut, Munich Re’s epidemic and pandemic insurance offering provides a broad range of cover for the economic damage caused by severe infectious disease outbreaks. Economic damage covered may include loss of gross profit, the extra expenses needed to continue operations and/or extra time to pay the interest on financial obligations. He said that a quick provision of liquidity is key to helping businesses survive disease-caused interruption. Insurance is available for a wide range of industries and indeed there is no dominant industry sector amongst Munich Re’s clients, he said.
“The structure of the policy typically relies on a simple and transparent parametric definition of the epidemic outbreak, such as the World Health Organization announcing a Public Health Emergency of International Concern, which is the highest alert level under the International Health Regulations,” Kraut said. “Reflecting the time structure of a long-lasting epidemic outbreak also is important to create a fair policy without insurance gaps in renewal situations.”
Kraut stressed that external risk transfer via insurance is just one part of managing pandemic risk, and that organizations must implement a comprehensive risk management strategy.
“Implementing an insurance program also helps corporates to implement an institutionalized risk management process which ensures regular monitoring of this risk factor,” Kraut said. “Nevertheless, trying to insure all potential economic losses simply is not an efficient use of capital for risks with such a high expected loss.”
Dealing with such a massive risk needs cooperation between the public and private sectors. According to Kraut, the Asia-Pacific Economic Cooperation forum’s finance ministers have officially endorsed the recommendation to implement an epidemic risk markets platform through a public-private partnership approach.
“Country engagement is intensifying in different regions,” he said. “The epidemic risk markets platform provides a basis for not only incorporating different sources of capacity, i.e., more shoulders to help carry the risk, but also to address affordability via the combination of different financial instruments – in particular insurance and contingent lending.”
At present, most businesses have yet to develop significant preparation and response plans to disease outbreaks. Kraut believes that they should do so quickly.
“To illustrate the dramatic increase in frequency for large scale infectious disease outbreaks, you may look at just the single virus category of coronaviruses,” he said. “There have been three major events of new emerging diseases within a time period of 17 years – SARS, MERS, and now COVID-19.
“Something has changed over the last few decades and that we are talking about percentages of probability of occurrence every year. This is in line with available risk models, both commercial and proprietary, some of which have published numbers of around 3% every year. And this is the reason why we need to prepare for the next pandemic.”
How is your organization preparing for a disease outbreak? Let us know in the comments.