German insurers say cat bonds may be needed for pandemic cover as BI market backs away

The German insurance association, the GDV, has reminded policyholders and the wider market that they should not expect to be able to call on their standard business interruption (BI) policies for coronavirus-related losses, because it is generally excluded. In an article on its website quoting a number of German market insurance and reinsurance experts, the association said there is likely to be a spike in demand for pandemic-specific insurance because of the current outbreak. But it is not clear currently how much appetite there will be to provide such cover among most insurers, because so many will already be directly exposed to this risk via life insurance policies. It is, however, possible that solutions may emerge from the capital markets in the form of catastrophe bonds as has been the case in other catastrophe lines, suggested the experts interviewed by the GDV. Not surprisingly, the German insurance association was quick to make clear that almost all standard BI policies will not cover the virus. “Few companies have cover for this type of risk. There are policies covering loss of earnings due to business interruption. Organisers of concerts or trade fairs can also take out cancellation cover for their events. However, in those instances cover normally only extends to fire, theft, storm or other natural hazards. It is possible to widen the scope of the cover – for example to business closures due to infectious diseases specified in the contract. However, that is rarely the case,” explained the article. “Business interruption cover for infectious diseases is few and far between,” said Fabian Konopka, an expert from Funk insurance brokers in Hamburg, according to the GDV. The main problem for the insurance market is the complexity of calculating the consequences of a virus outbreak and potential accumulation risk. Other accumulation events, such as hurricanes or earthquakes, are at least confined to a certain region, which is not the case for pandemics. This works against the principle of risk diversification. “There is a tipping point when insurability reaches its limits – at least as far as traditional insurance products are concerned,” Gunther Kraut, head of epidemic risk solutions at Munich Re, told the GDV. Mr Kraut added that the insurance sector is also reluctant to cover financial and business losses triggered by infectious diseases because many are already exposed through their life insurance policies. He explained that, if a previously healthy person dies, it is immaterial whether it is from cancer or a new infectious disease – the contract has to be honoured. “That brings many insurers as far as they can go,” Mr Kraut is reported as saying. Mr Konopka of Hamburg-based broker Funk added that there is nothing new about the concept of insuring illness-induced losses. During previous epidemics, such as SARS, insurers offered cover through BI policies, excluding property. He pointed out that one of the reasons why these products didn’t rise beyond niche status was the low take-up by companies. “Demand for such solutions has been very low in the past,” he said. Munich Re’s Mr Kraut said that interest among customers in pandemic insurance solutions will clearly rise as a result of the virus but he is not sure that adequate capacity will be available from the standard market. This may need insurers and reinsurers to work with institutional investors to find catastrophe bond-type solutions, he suggested.

German insurers say cat bonds may be needed for pandemic cover as BI market backs away

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