This serial element is accentuated even further by the global nature of pandemic risk.

Added to this, the geographical diversification of risk portfolios is ineffective and actually compounds the accumulation of losses for global re/insurers, SCOR warns.

The reinsurer also believes that rather than obeying the “laws of nature”, the risk of business interruption linked to a pandemic is largely endogenous.

It very much depends on the specific measures implemented by governments to stem the spread of the virus. The operating losses suffered by businesses are mainly due to these measures, which have ultimately limited or stopped business activity.

SCOR says this drastic and intractable insecurity makes assessing risk and calculating insurance premiums impossible.

Another reason as to why it has been deemed uninsurable is the risk’s links to potential issues of adverse selection and moral hazard. Only companies in the most affected sectors would buy protection unless it were compulsory, which would raise questions of acceptability.

Compulsory insurance would put companies in sectors that have been spared, such as e-commerce, in an unfair position as they wouldn’t necessarily benefit from taking out the insurance.

In this case, coverage of the cost of lockdown by third parties (insurers) would create an obvious moral hazard issue for governments, which would no longer assume the economic cost of the decisions they take, even though they are deciding the ways and means to respond to the public health crisis and are ultimately responsible for managing it.

SCOR believes that it’s the government’s responsibility to cover the cost of the economic impact of such a major crisis, through redistribution mechanisms that spread the cost over all economic agents, and even over several generations.

Source: Reinsurance News