Consulting firm Finity has set out possible frameworks for covering pandemic risks that are beyond the scope of the private sector in a paper commissioned by the Insurance Council of Australia (ICA).

The four options presented range from a status quo baseline framework up to a Government-backed pandemic facility that could be modelled on terrorism cover in Australia and other countries.

Finity says the paper provides a basis for discussion, with further investigation and modelling and public policy decisions required before any path could be chosen as the best way forward.

“This issue is not one that can be easily solved, and it does require quite a bit of thought and study to try and create a framework for funding these events in the future,” Finity Principal Rade Musulin told insuranceNEWS.com.au.

“Some of this involves some public policy choices around what the Government wants to prioritise. There is a process that has to be gone through to arrive at the right answers.”

Finity was engaged by ICA to identify insurance-related options that the Government may undertake to mitigate the economic effects of future pandemics, including where insurance-based mechanisms may be relevant, and the potential role of the private sector.

The report says without exclusions in place, COVID-19 losses for business interruption would have been devastating for the insurance industry, and pandemic risk is not insurable by the private sector alone.

Based on the number of businesses that have either ceased or reduced trade due to government restrictions, Finity estimates total business interruption losses would be around $5-10 billion for a three-month period, if all COVID-19 disruptions were compensated, but only about 30% of SMEs have business interruption cover.

Finity says significant private sector reinsurance support for widespread pandemic coverage is not expected in the foreseeable future, and exclusions are likely to be tightened and continued.

“While pandemic modelling is developing rapidly, it is unlikely that sufficient modelling tools will exist in the near future to allow for the type of risk quantification required to support tens of billions of risk capacity, in the form of capital and reinsurance, necessary to underwrite pandemic risk in the same way that bushfire, flood, tropical cyclone or earthquake is,” it says.

Pandemic pools are being discussed in overseas markets, including the US and the UK, while some more limited programs, covering areas such as trade credit, have been introduced.

Framework Two in the Finity report, the simplest level of support above the baseline, points to similar arrangements to UK and EU action on trade credit, involving narrowly defined solutions created for specific industries.

Framework Three suggests a newly created form of business protection designed to provide a short-term limited benefit over potentially 1-3 months. The coverage would be distributed by commercial insurers, have simple coverage and pricing, have the government take underwriting risk and with insurers collecting revenue and paying benefits.

The report says that if there is to be any benefit from a hybrid insurance/government solution, there needs to be demonstrated value to the public from insurer participation.

“Australia currently benefits from a well-functioning insurance system which delivers cost-effective products to Australians in many lines,” it says. “Care must be taken to avoid disruption to that system to address the challenges arising from pandemic.”

Business interruption also offers potential difficulties, compared to some other coverages, due to relatively complex processes in the area, including the way losses are determined.

Mr Musulin says pandemic outbreaks present greater challenges for private insurers than terrorism events, which are more clearly defined and have been more geographically localised.

“Pandemics also trigger more economic disruption, which makes them more difficult to insure because assets are affected in addition to the losses,” he said.