Human pandemic:
The role of
insurance
Protection against infectious disease outbreaks
Insurance is more than a financial safeguard; it is a critical enabler of resilience and long-term recovery. When a pandemic occurs, the ripple effects can disrupt every facet of society – healthcare systems, education, travel, hospitality - causing economies and individual livelihoods to suffer.
With extensive expertise in risk assessment and crisis management, the insurance industry is well equipped to help businesses and governments prepare for future pandemics. As well as paying claims, insurers can support with advice on proactive measures to lessen the impact of potential crisis, such as how to manage prolonged closures and economic downturn, and how to leverage insurance to help mobilise resources and expertise to support rapid emergency response and containment efforts. The emerging pandemic insurance market offers a spectrum of financial support and protection against the economic impacts of an infectious disease crisis.
Key product considerations
Pandemic insurance and preparedness: In a world where the echoes of the COVID-19 pandemic still resonate, readiness is not an option – it is a necessity. Munich Re, in collaboration with International SOS, has introduced a forward-thinking approach to pandemic preparedness which integrates advanced health advisory into a robust insurance and risk financing solution.
What are the key benefits?
- Risk mitigation: Financial protection for reduction in income from business activities
- Cost recovery: Health and safety related costs to comply with outbreak related regulations are covered
- Liquidity assurance: Pay for fixed costs such as ongoing debt service, rent and royalties
- Workforce stability: Enables swift return to normal working post outbreak
How does the product work?
Epidemic/pandemic trigger
1. When: Disease outbreak reported by World Health Organization (WHO)
2. What: WHO declares a Public Health Emergency of International Concern (PHEIC)
3. Where: Named Country Civil Authority Restrictions comes into force
Economic impact
- Loss of profit
- Other pre-agreed financial metrics such as extra operating expenses or debt repayment of fixed costs
Expert advice & payout
Along with tailored advice, businesses gain access to a pandemic threat dashboard and an expert assessment of pandemic readiness.
Indemnity, parametric and derivative payout formats are available and express claim settlements can be available within days.
Some examples of the cover available include:
Restrictions on large gatherings: Large gatherings of people in one area are often among the first settings to be restricted or cancelled to prevent the spread of infectious diseases. Insurance can protect against catastrophic revenue impacts, with a range of options for the event organiser including low attendance, behind-closed-doors, or complete cancellation.
Mitigation and containment measures: At the initial outbreak of a disease there are critical actions that governments can take to prevent further spread, all of which require immediate funds to be available. Insurance can play a pivotal role here, cover providing immediate response costs to fund vaccine rollout, surveillance, PPE and medical equipment purchasing, campaign funding and other health-related items. In the case of developing nations, this innovative funding can help to reduce over-reliance on external donor support by enabling rapid, country-led responses to disease outbreaks and epidemics to prevent further spread.
Business continuity plans: As evidenced by COVID-19, a disease outbreak is not just a financial headache – it is a management migraine. Expert advisory services enable efficient, effective decisions before, during and after the crisis giving confidence to management and reducing potential liability. Insurance can support with expert design of a pandemic business continuity plan and can fund the pre-pandemic rollout, offering comfort to all stakeholders, internal and external, that resilience is enhanced in readiness for a potential new outbreak.
Employment costs: A pandemic insurance policy can provide cash flow to pay for wage roll or a furlough scheme that bridges a sharp revenue drop due to loss of workforce and subsequent high training and employment costs. Additional cash flow can also cover sympathetic employee benefits enabling the sick to recover and carers to return to work.
Business interruption insurance: When a pandemic leads to mandatory shutdowns or a sharp decline in consumer activity, businesses face substantial income losses and operational challenges. The insurance industry has worked to develop standalone business interruption products for infectious disease outbreaks. Business interruption insurance helps companies recover lost revenue over a specified period from closures and cover ongoing expenses, allowing them to stay afloat during crises and resume operations more quickly once normality returns.
Key product considerations continued
Vaccine insurance: The challenge of global vaccination does not end with vaccine development. Distributing billions of doses of cold chain vaccines and pharmaceuticals requires a complex and robust transportation programme that can reach all corners of the globe, regardless of the quality of the local infrastructure.
In 2020 Lloyd’s Lab alumni Parsyl, partnered with the U.S. International Development Finance Corporation to launch the Global Health Risk Facility through their Lloyd’s “Syndicate in a Box”. This initiative provides affordable ‘All Risk’ cargo coverage for the transit and storage of global health products related to COVID-19 and other infectious disease control and prevention programs, with a particular focus on supporting the distribution to developing countries where they are most needed.
Event cancellation insurance: Pandemic mitigation strategies, such as restrictions on travel, public gatherings and social distancing can lead to event postponements and cancellations - from private weddings to music festivals and major sporting events, such as Glastonbury or the Olympics. These cancellations can result in staggering financial losses, with one event potentially costing over €500 million[18]. Event cancellation covers incurred costs, or loss of profit because of unforeseeable abandonment, postponement, interruption or cancellation of events. Lloyd’s paid out around £6bn in COVID-19 claims to customers in 2020, with roughly a third of these payouts covering event cancellations or postponements.
In 2021, Lloyd’s partnered with the UK government to launch the £800 million UK Live Events Reinsurance Scheme to provide coverage for the live events sector, which is worth over $70 billion annually and supports more than 700,000 jobs[19]. By protecting businesses from COVID-19 related cancellations, the scheme facilitated the sector’s recovery and preserved thousands of jobs as the lockdown ended and social spaces reopened.
Travel and aviation insurance: Travel restrictions can mean that the tourism industry suffers in a pandemic. Personal travel insurance can help alleviate this for individuals whose plans have been curtailed. For the travel hubs, such as the Caribbean, where the economy is dependent on tourism and income diversification is a challenge, tailored insurance is available to helps build resilience to travel disruption.
The aviation sector could be significantly impacted by a future pandemic in the event of international travel bans. The high costs of maintaining grounded aircraft fleets combined with the loss of passenger revenues create substantial financial challenges. While aviation insurance typically covers for liability for injuries or property damage to the aircraft, airport or hangars, insurance also plays a role in helping businesses mitigate financial volatility. During COVID-19 insurers provided premium credits for hull and liability insurance on grounded aircraft and workers’ compensation premiums were adjusted to reflect reduced payrolls to help operators manage their expenses.[20]
Livestock and crop insurance: Lockdowns, illness and a ban on international travel mean far fewer workers to process meat and harvest crops. Farmers may be forced to let crops rot in the fields and if there is no prospect of lockdowns lifting, may not plant more, underusing their resources. Additionally, there is the risk in the event of zoonotic disease that meat stocks may be subject to a mass cull. Livestock and crop insurance can compensate damage to or destruction of farmers’ stock, business continuity costs, and create access to credit facilities to support risk mitigation.
Economic downturn: Global economic downturns often follow pandemics, as evidenced by the 9.7% decline in UK GDP during COVID-19.[21] Insurance can alleviate these economic impacts and support with recovery. For example, both private and public institutions with large loan portfolios are at risk of non-payment of their loanees. Insurance can reduce this risk and therefore the volatility of the loan portfolio. For example, banks can purchase parametric insurance whereby in the event of a natural or health disaster such as drought, flooding, epidemic or pandemic, a payout will be triggered, temporarily lifting borrowers’ repayment obligations. In developing nations, these initiatives allow investors to bring forward their climate and health-related investments and projects while building greater resilience.
[18] https://www.marsh.com/en-gb/risks/pandemic/insights/covid-19-considerations-for-insurance-industry.html
[19] https://www.gov.uk/government/news/government-backed-insurance-scheme-to-give-boost-to-events-industry#:~:text=Lloyd%E2%80%99s%20has%20stood%20by%20its%20customers%20throughout%20the%20pandemic,%20and
[20] https://www.ajg.com/us/-/media/files/emergency-preparedness/aerospace-aviation-insurance-responds-to-covid-19-38314-ggb.pdf
[21] https://commonslibrary.parliament.uk/research-briefings/cbp-8866
You can read more about how insurance provides protection against economic risks in our global economic stagnation scenario.
Facing into a braver future
It is not a question of if, but when - and how severe - the next pandemic will be. As an industry we can continue to draw on our extensive expertise and lessons learned from the COVID-19 pandemic to refine our products so that we offer innovative solutions to safeguard against future outbreaks of infectious disease.
In 2020, Lloyd’s published a report offering several solutions that could offer customers greater protection against a future wave of the COVID-19 pandemic or against future systemic risks. The paper also outlines additional ways in which Lloyd’s and the global insurance industry could respond to protect customers.
Understand the exposure: A pandemic potentially has no geographic boundary and can trigger multiple claims across multiple classes of business at once. This means a pandemic is more complex to model, price and aggregate than other catastrophe risks. While pandemic was a known threat prior to COVID-19, the insurance industry now has a far better understanding of cross-class exposure correlation and this can be reflected in the recalibration and enhancement of pandemic pricing and probabilistic catastrophe models. A stronger understanding of the risk means that insurers are in a more confident position to offer protection to businesses, knowing they hold adequate capital to withstand a major event.
Provide clarity to customers: The COVID-19 pandemic highlighted areas of complexity and uncertainty around certain policy wordings. In 2021 Lloyd’s partnered with the Lloyd’s Market Association (LMA) to promote ways to improve the clarity of insurance contracts for the benefit of policyholders. Looking ahead, the insurance industry has an opportunity to further extend its efforts to simplify products and promote greater understanding of the cover it is providing to its customers.
Cross market response: The impacts described by this scenario are too large for any one sector to manage alone, and engagement across the whole financial services market is therefore essential to ensuring there are strong structures and financing in place to fund new pandemic risk products. For example, by working closely with capital markets, insurers can assess alternative forms of capital, such as pandemic catastrophe bonds, which provide parametric protection for non-damage business interruption (NDBI) risks.[22] While capital markets can provide additional commercial capital to support pandemic products, partnership with government is key to scaling resilience at a national level.
[22] https://assets.lloyds.com/assets/lloyds-covid-19-final2/1/Lloyds_covid-19__FINAL2.pdf
The government perspective
With the benefit of hindsight, the G20 has now called for global funding dedicated to managing disease monitoring and preparedness worldwide to be doubled. Another pandemic of some degree is expected to occur in the next 20 years and any increase in severity would test the current approach. There are several steps governments can take to improve their resilience in the face of future pandemics.
Monitoring
Infectious diseases are unpredictable and move quickly. Delays in the early stages of a virus can allow it to spread unchecked. The UK government funded UK Public Health Rapid Support Team in partnership with the London School of Hygiene and Tropical Medicine proactively researches and monitors infectious disease outbreaks at their source, working with low-and-middle income countries (LMICs) to support effective response and reduce the possibility they develop into a global health emergency.23 Government backed ongoing surveillance, research, and global coordination, paired with pre-emptive planning, will make a substantial social and economic difference, and likely save lives.
Resilience investment
With healthcare provisions already stretched, forward planning and finance will help governments make decisive responses to any future event. Governments could devise plans that prioritise the stockpiling of personal protective equipment (PPE) and healthcare equipment, particularly those without expiration dates. Equally, investments in emergency healthcare infrastructure such as crisis hospitals, reserve medical staff and scalable pharmaceutical manufacturing capacity, including vaccine development, will be key to managing future outbreaks.
Cooperation
Sharing expertise and insights between the private sector, government and international experts can help to embed best practice into how to prepare for future pandemics. These partnerships can enable innovation and ensure that preparedness strategies are both practical and effective. This could include encouraging small-medium business owners to adopt business continuity plans which ensure they can operate in a hybrid or remote way with minimal impact to their revenue.
International alliances are crucial for establishing agreements for sharing critical resources and cross-border agreements. Multilateral coordination organisations, such as the World Health Organization (WHO), focus on surveillance, information sharing, and vaccine distribution, and these frameworks have demonstrated resilience even during geopolitical tensions.
Explore the impact of infectious disease outbreak
The economic impact
Additional insight from the scenario
Disclaimer
This report has been produced by Lloyd's Futureset and Cambridge Centre for Risk Studies for general information purposes only.
While care has been taken in gathering the data and preparing the report Lloyd's and Cambridge Centre for Risk Studies do not, severally or jointly, make any representations or warranties on behalf of themselves or others as to its accuracy or completeness and expressly exclude to the maximum extent permitted by law all those that might otherwise be implied.
Lloyd's and Cambridge Centre for Risk Studies accept no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.
Note that this report does not seek to replace or inform any of the mandatory scenarios which Lloyd’s publishes to support the Realistic Disaster Scenario exercises managing agents are required to undertake in respect of the syndicates managed by them.