Better mechanisms are required to build economic resilience and preparedness against epidemic and pandemic risk – and there’s a solution that combines insurance coverage and contingent lending in a new way
The frequency and severity of epidemic outbreaks are increasing. The economic consequences of COVID-19 have been dramatic and are still unfolding. Risk-modelling agencies quantify the probability of another event of the same or greater magnitude as COVID-19 within the next 10 years to be around 25%. These simple facts combined demonstrate the necessity for better mechanisms to increase economic resilience and preparedness.
Insurance is one of the most established instruments of financial risk management. But as public discussions over the past two years have highlighted, the sheer size and accumulation risk potential of global pandemics push such exposures beyond the limits of straightforward insurability. Simultaneously, large-scale government support measures have taken place – with the evident disadvantages of ex-post risk management.
How can a prudent and resilient financial ecosystem be created in which risks are carried by many shoulders and remain affordable? The Epidemic Risk Markets Platform is a Public-Private Partnership approach that combines insurance coverage and contingent lending in a new way. Protection needs of corporates are better addressed and greater involvement of financial markets in pandemic risk financing is enabled. Compared to the status quo, strong advantages are evident: (1) supporting a PPP scheme sends a clear government signal to the markets and sets risk-adequate incentives to increase preparedness, (2) no subsidies are required, (3) existing infrastructure and distribution networks of the financial industry can be used, also to ensure quick access to liquidity when needed, and (4) the modular set-up allows for a start with different and feasible capacity commitments.
The Epidemic Risk Markets Platform is intended to complement other approaches as government ex-post funding will certainly still play a dominant role in the next pandemic. But the underlying risk-transfer solutions have already been developed and implemented.
A recent example is the PPP framework for pandemic risk transfer, which has been endorsed as a priority for the Finance and Economics Working Group of the APEC Business Advisory Council. Specific recommendations around pandemic risk transfer to APEC leaders and finance ministers are being developed, whereby the goal is to simultaneously implement the full value chain of the Epidemic Risk Markets Platform via pilot transactions with member economies or specific sectors.
Multiple stakeholders benefit from an Epidemic Risk Markets Platform:
- Protected corporates: Purchase epidemic risk insurance and contingent lending solutions to increase preparedness
- Insurers: Actively promote risk-transfer insurance solutions with assistance from intermediaries and reinsurers
- Banks and lenders: Facilitate contingent lending solutions through accepting the lending on their own balance sheet and/or channelling central government support
- Investors: Invest into the capital market product and pledge capital for a periodic market rate of return
- Governments: Act as public-sector lender or as public-sector investor and incentivise preparedness within regulatory frameworks.
No sector can solve the challenge alone, but by combining available instruments in a smart way, a powerful and necessary tool can be created to increase overall resilience.
For more details on available risk-transfer products:
For more details on the Epidemic Risk Markets Platform: