Eiopa still mulling pan-European pandemic and multi-risk NDBI pool

A new consultation paper from Eiopa on how best to improve business interruption (BI) insurability in light of Covid-19, concludes that a pan-European scheme is potentially warranted and that multi-risk pools should be considered. Eiopa’s paper is out for comment until 31 March and draws some interesting conclusions for risk and insurance managers. It is the second Eiopa paper on possible BI solutions after Ferma and other buyer representatives welcomed the regulator's comments on a potential pan-European pandemic insurance solution with EU funding at the very top back in July. Eiopa added then that such a scheme could be adapted to cover other systemic risks, and its new paper shows that the regulator is still thinking along similar lines. It notes that although proposed schemes across Europe to cover future non-damage business interruption (NDBI) pandemic risks have similarities, there are also many differences. Experts, including Ferma, have previously pointed out that such differences would make it hard for businesses operating across Europe to get protection in place and have called for a pan-European pool ultimately backed by EU funding. And it seems the European regulator is still considering this option, concluding in its paper that the response “possibly” warrants a coordinated European approach. Ferma, among others, has also stressed that the nature of risk means any NDBI pool would ideally cover a range of perils. The argument goes that it is impossible to predict what future risks may strike, so a wider solution is needed. And, again, Eiopa seems to support this view. It says that while the diversification benefit from pooling is “not clear”, multi-peril solutions “can provide opportunities for addressing the risk of ‘following’ events, developing common prevention measures, as well as addressing the opportunity cost of separate peril solutions (i.e. the fact that a single-peril pool is designed for the last crisis and will not address the next)”. “In the short term, the focus can be on pandemic schemes, but the option to introduce future-focused multi-peril pools should be considered going forward,” it adds. The paper concludes that common challenges exist when it comes to pandemic risk prevention, transfer and pooling. It says, therefore, that investments should be made to improve pandemic risk modelling to cover socioeconomic vulnerability and behaviour of businesses, individuals and public authorities in response to the risk. Additionally, the definition of objective and relevant parameters to trigger claims requires further analysis, says Eiopa. It adds that insurers can help reduce losses by promoting risk prevention measures. “This includes improving clarity on the scope of coverage as well as risk-based pricing of the cover and potential risk-reducing prevention measures, showing the true cost of the risk,” says Eiopa. This could be supported by regulatory incentives, as well as public-private initiatives for sharing data and aligning incentives for prevention measures, it continues. Adding: “As part of such public-private initiatives, measures can be taken to align public-private incentives for risk prevention, reducing moral hazard and improving on the insurability of the risk.” The paper also concludes that capital markets offer a potential alternative layer of risk transfer for BI pandemic risk to traditional (re)insurers. But it stresses that there are challenges around designing new and successful capital market instruments. These range from generating enough return and diversification for investors, to designing suitable parametric triggers, it says. Eiopa adds that progress on pandemic risk modelling and pricing will be needed to bring capital markets to the table, but says public-private solutions could ultimately involve investors. Comments on Eiopa’s paper can be sent to sharedresiliencesolutions@eiopa.europa.eu

Eiopa still mulling pan-European pandemic and multi-risk NDBI pool

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