Epidemic Risk Insurance – Saving lives, protecting economies
While the insurance industry has tended to keep away from epidemic risks in the past, it is now looking at ways to develop valuable solutions for this business field – at the same time strengthening the resilience of companies and societies alike.
In global public health, 2016 was a year defined by the end of two epidemic emergencies: Ebola and Zika. While the risk posed by such viruses has not gone away, these epidemic emergencies have at least awakened the world to the threat posed by weak health systems and poor primary healthcare and how sensitive parts of the economy react to such outbreaks.
Insuring events with huge economic risks
If we put ourselves in the shoes of a corporate risk manager, we would see a broad range of risks, some of which are insurable and others are not. Up to now, the financial consequences of an epidemic outbreak have not been covered and have remained part of a company’s entrepreneurial risk, leading to significant losses or even to bankruptcy in some cases. Now Munich Re offers protection against this exposure and is well prepared to discuss relevant scenarios.
Epidemic risks are per se hard to predict and even harder to insure. When it comes to entering this specific field of risks as a (re)insurance company, it is all about knowledge – evaluating historical data and forecasting future scenarios. On top of that, the accumulation risk posed by a severe global pandemic cannot be ignored by underwriters. With its ideal background in this sphere, Munich Re is vigorously looking into these new business cases to expand the possibilities of even insuring events with huge economic risks.
The epidemic risk project fits in well with various innovation projects Munich Re is engaged in. It is close to our core business and at the same time is an opportunity to push the frontiers of insurance. While working on our data, we simultaneously develop anticipatory products for various eventualities across various industries and sectors.
During the Ebola outbreak, labour-intensive industries suffered in particular. Selected loss examples are available for various sectors:
- At a large rubber plantation, several thousand workers were employed when the Ebola outbreak started. The operating company provided healthcare to 80,000 people, including dependants of the workers, and the surrounding population. During the course of the outbreak, employees also fell sick with Ebola. In response, the company built its own treatment facility for Ebola patients and set up a comprehensive response to prevent transmission.
- Operations in several mines or exploration projects were disrupted. Contractors declared force majeure and staff were evacuated.
- Similar effects could be observed in various other industries. Consequences went as far as declarations of inability to meet financial obligations.
New partners, multiple possibilities
Finding the right pricing and risk management approach is paramount. We therefore tap into partnerships with companies who have unique expertise. Strategic cooperations – for example with Metabiota, a San Francisco-based company that has pioneered the use of near-real-time data collection and comprehensive risk analytics for epidemics – place us at the forefront to ensure that even challenging cases like Ebola, SARS and MERS can be covered.
The idea is fairly simple – and actually not too far removed from our expertise and handling of natural disasters. To find the right price tag for a politically and economically sustainable risk-transfer solution, we have to gather consistent historical data – for example about frequencies and severities. In 2015/2016, we already made an impact with an effective and event specific kind of travel insurance which was introduced by the government in partnership with the private sector during the ongoing MERS outbreak: the fall in the number of visitors to Korea, and thus the economic downturn, proved to be smaller than expected. Generally, for insurance products targeting the tourism industry, the public perception of an epidemic is more important than case counts. However, policies for directly affected industries can also include additional services to ensure optimal loss mitigation during an ongoing event and thus contribute to keeping operations up and running.
Strengthening the resilience of companies and societies
Our strategic approach involves working on private and public-sector projects simultaneously. When it comes to translating our data knowledge into concrete statements regarding the potential economic loss, our technical underwriting is in demand – to understand the very specific needs of our clients. In other words: asking the right questions about precautionary measures – from simply installing disinfectant dispensers on the premises to standardised preparedness or epidemic business continuity plans. Unlike even more action-driven industries, insurance companies are often the first ones to ask those critical questions and to start the awareness-raising process.
The advantage of an insurance mechanism to protect against epidemic outbreaks stems from an ex-ante financing of the necessary response measures geared to rapidly contain the outbreak itself. The benefits are obvious as the course and severity of an epidemic can – unlike in the case of an earthquake – be influenced while it is ongoing.A well designed insurance mechanism is conducive to the emergence of reliable prevention plans, standardised emergency preparedness, up-to-date public information, swift response and containment, enhanced cooperation and accountability for results.
As a consequence the overall human suffering and cost burden for societies can be largely reduced. Thus, although it is often claimed that governments have deep pockets, there are many good reasons to use insurance as an instrument to strengthen the resilience of companies and societies. And this is our very motivation. We are happy to work with individual companies, development organisations and governments alike.