The Organisation for Economic Co-operation and Development (OECD) says government-backed insurance programs designed for business interruption losses from future pandemics may need to have automatic inclusions to ensure widespread cover.

“Experience from other catastrophe risk insurance programs suggests that merely making coverage available may not be sufficient for achieving broad coverage,” the OECD says in a report on responding to COVID-19 and the protection gap in insurance.

It says program designs need to consider how to achieve broad coverage, while limiting public sector exposure and encouraging risk reduction.

The report proposes assessing the ability of leveraging private market capacity as part of any program, while noting problems for insurers from lack of geographic limits and correlations with financial markets.

Solutions could include that government backing targets the highest layer of losses, although private sector appetite for first-loss coverage may also be limited.

It suggests insurers could taking a proactive role in ensuring policyholders have continuity plans or other risk mitigation measures in place to reduce losses caused by widespread business closures.

“The insurance sector could also become an advocate for strengthening government preparedness through a pandemic risk insurance program,” it says.

“For example, the insurance sector might only make coverage available if a government invests sufficiently in healthcare capacity.”

Catastrophe models for pandemic risk have existed for some time, but have focussed on morbidity and mortality, rather than business interruption losses

“It may be some time before private (re)insurance markets will be willing to make available significant capacity for pandemic risk, and therefore thresholds for government involvement may need to be set at fairly low levels,” the OECD says.