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by Klaus-Peter Rhler, guest author of Euro am Sonntag
D.he global production loss due to the virus and the associated lockdowns will amount to 4.5 trillion US dollars in 2020 alone, according to the World Bank. With $ 30 billion in business interruption insurance premiums annually, it would take the industry 150 years to absorb just the 2020 COVID-19 damage. This is the conclusion reached by the Geneva Association, the largest international think tank for insurers, in a study.
The General Association of the German Insurance Industry (GDV) estimates that customers throughout Germany have so far paid annual premiums of around 25 million euros for business closure insurance. In 2020, however, the entire insurance sector has already paid or set aside around 900 million euros for company closures – so the loss rate is quite high.
It all sounds terrifying. On the one hand. On the other hand, these numbers are only the logical consequence of how an insurance works, namely according to the “principle of large numbers”: Many people pay a comparatively small contribution so that a few people affected get a lot of money if they are damaged. So the load can be distributed across all shoulders. In the event of a pandemic, the principle no longer applies.
Why? In order for the insurance principle to be actuarially representable, the risks must be statistically assessable and, above all, sufficiently independent of one another. This is the only way to spread the risks according to parameters such as time axis, geography or type of damage, which then results in comparatively small contributions.
Interactions between different risks
This is exactly where it becomes problematic: The criterion of “independent risks” is not met in the event of a global pandemic. The business interruption and closure affected many industries geographically across the board due to the same cause – the coronavirus. In addition, in a pandemic there is even an interaction between various risks such as business interruptions, effects on global capital markets, increases in medical costs and mortality.
A pandemic is like a “wildfire” that spreads rapidly across many countries. For insurers, a pandemic is one of the so-called accumulation risks – dangers that simultaneously cause disproportionately large amounts of damage. The capital requirement associated with this risk would be so high that effective coverage solely through the private insurance market would require premiums that would be completely unattractive, if not unaffordable, for policyholders.
At the same time, the corona crisis has also revealed massive protection gaps, especially in the area of company closures and interruptions. Of course, many possible solutions are conceivable, including that the states organize insurance alone. However, it would make sense for the insurance industry and the respective state to work together. The reasons: Insurers know how to make payouts quickly and smoothly. In addition, the existing customer relationships facilitate identity verification.
We want to play an active part in making protection, especially for small and medium-sized companies, available for potential future pandemics in a more predictable and faster manner right from the start. The alliance is therefore involved in various initiatives to develop a solution to cover the pandemic risk. All parties involved agree that solutions can only be developed jointly between the insurance industry and the states, whereby the insurance industry will only be able to bear a relatively limited part of the burden.
Should a solution be European or more national in nature?
Four key questions emerged: Is a capital collection point or insurance the more appropriate option? Should the system be voluntary or mandatory? What is the appropriate trigger to bring this system to fruition? And finally: should a solution be European or more national in nature?
The GDV has presented two options for a state-private-sector solution: One option would be a capital collection point that pays out flat-rate services depending on the company’s turnover in the event of a wave of infections. The target size of the capital stock is based on the benefit case and a target scenario, the parameters of which must be defined in advance, for example the percentage of companies closed for general preventive purposes, the duration of the deductible in days or the specific amount of the flat-rate benefits.
Another option is a more risk-oriented system, which is characterized by the likelihood of damage occurring, similar to voluntary insurance, in which companies pay for a specified target damage that they want to be compensated for. Each company thus determines for itself which services it would like to receive in the event of infection. Both models require significant government involvement in order to keep the system affordable.
We as Allianz advocate the development of special pandemic protection for all countries in Europe, in cooperation with the insurance industry and the government. In the case of a defined pandemic, the insurers would provide benefits up to a defined amount, whereby the calculation could be based on the assumed recurrence probability of a pandemic, for example. Such a premium, since it would reflect the full risk situation, would be prohibitively high. If the insured are to be given reduced premiums for this coverage, the state could subsidize them. If necessary, the state can of course also stipulate further state benefits above the defined level.
What speaks in favor of a mandatory solution is that a voluntary insurance solution does not result in comprehensive coverage – rather, one would find a kind of “patchwork quilt”. One consequence could be that there would be pressure on the states to step in, also and especially in cases in which there is no insurance cover. This disadvantages those who have taken responsibility and made provisions themselves. In addition, with a voluntary solution, it is more difficult to keep the premiums affordable. We absolutely want to avoid that. A mandatory solution would still have to ensure that there is lean and unbureaucratic coverage and that economic considerations are not disregarded.
Quickly create the framework for pandemic protection
The focus of such protection should initially only be on the pandemic and not include further systemic risks such as terror, cyber attacks or the like, as otherwise the pricing would be extremely complex due to the mixing of several risks. It should also initially target small and medium-sized companies and the self-employed in order to protect these companies, which are particularly affected by company closures due to pandemics. In addition, specific insurance solutions tailored to the individual company are conceivable for large companies.
From our point of view, it is now important that in Germany and in the other European markets, politicians determine the framework conditions as quickly as possible, how the respective pandemic protection should be designed. Only when this framework is in place can insurers begin product development.
Board member of Allianz SE
Rhler is responsible for the insurance business in Germany, Switzerland, Central and Eastern Europe as well as the global property insurance business.
Allianz is the market leader in the insurance business in Germany and serves more than 100 million customers in more than 70 countries worldwide. In addition, Allianz is one of the largest asset managers in the world.
Image sources: Christian Schwier / stock.adobe.com, Allianz Deutschland AG