Geneva Association: Insurers would have to collect premiums for 150 years to cover the global output loss in 2020

3 June 2021 — Alexandra GUZUN
Insurance Europe has published its 2020-21 Annual Report and the topics covered include the lessons learned from the COVID-19 pandemic; the need to enhance climate change adaptation and close protection gaps; ways to ensure citizens have enough income in retirement; and how policymakers can support insurers in their role as Europe's largest long-term institutional investors.

The report examines key issues related to building resilience in European societies and economies. The topics will also be discussed during Insurance Europe's Resilience Week: five days of high-level webinars exploring insurers' role in building resilience to the challenges of today and tomorrow.

As regards the challenges faced from the beginning of the pandemic, the report shows that businesses across OECD countries faced an estimated USD 1.7 trillion in revenue losses for one month of strict lockdown measures. By comparison, the largest economic loss from a single event since at least 1970, the earthquake that hit the east of Japan in 2011, resulted in USD 234 billion of losses.

At the same time, COVID-19 has exposed massive protection gaps in the area of business continuity risk. The Geneva Association calculated in October 2020 that less than 1% of an estimated USD 4.5 trillion of global pandemic-induced GDP loss for 2020 will be covered by business interruption insurance.

It has also exposed the mismatch between pandemic-related economic losses and the risk-taking capacity of insurers. With annual business interruption insurance premiums of about USD 30 billion, insurers would have to collect premiums for 150 years to cover the global output loss in 2020, according to the Geneva Association.

According to the report, pandemic risk challenges the principles of insurability, but with significant differences depending on the area. Insurance for life- and health-related pandemic risks, for instance, is generally widely available and affordable, as the risks are not systemic and data is available that allows life and health insurers to model pandemic risk and price it accordingly.

The Geneva Association expects underwriting losses for life insurers from COVID-19 to be significant but manageable and believes that pandemic risk poses "no fundamental insurability challenges" for health insurers.

On the other hand, very nature of pandemics makes pandemic-related business interruption risks uninsurable by the property and casualty industry.

What has become clear as a result of the COVID-19 pandemic is that, in a number of markets or cases, there is some form of misunderstanding about insurance. Firstly, about the basic principles of how insurance works by spreading the losses of the few among the unaffected many and, secondly, about the cover provided by individual policies.

The insurers and reinsurers concerned are therefore reviewing their contracts to ensure absolute clarity over what is and is not covered under their policies, as the Report shows.

Moreover, understanding and acknowledging the insurability challenges must be the point of departure for any discussion of solutions for covering the risks of future pandemics. There is an emerging consensus around the fact that if insurers are to play a role, it will be one of collaboration with governments, with the latter assuming the majority of the losses.

At European level, Insurance Europe is involved in discussions on future pandemic risk solutions, notably by taking part in a workstream organised by the European Insurance and Occupational Pensions Authority to explore the options for and feasibility of shared resilience solutions.

Source: Insurance Europe

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