Pandemic parametric risk-transfer solutions for captives

Leigh Hall, Munich Re’s head of origination, epidemic risk solutions, and Dr Anthony Renshaw, global health advisor, health consulting, at International SOS, explain how captives can utilise available parametric risk-transfer solutions to enhance corporate resilience, mitigating the impact of the next pandemic and accelerating an organisation’s recovery

 

Captive Review (CR): Why should industry leaders consider pandemic resilience?

In the case of pandemics, the past unfortunately does not predict the future. In 2002, we had never had a significant coronavirus outbreak, since then we’ve had three (Sars, Mers and Covid-19). The frequency and severity of disease outbreaks is increasing; data modeller Metabiota predicts there is a 22%-28% chance of another pandemic equivalent to Covid-19 in the next 10 years. New data produced by Airfinity predicts there’s a 27.5% chance of a pandemic as deadly as Covid-19 in the next 10 years. Factors such as climate change, deforestation motivated by intensified agricultural production and urbanisation have significantly increased the potential for zoonotic diseases to emerge, the growth in international travel then facilitates global spread and the eruption of pandemics. Against this backdrop, United Nations experts have suggested that there are currently 1.7 million ‘undiscovered’ viruses existing in mammals and birds, of which 827,000 could affect humans. And as the world becomes an ever-smaller place, the transmission of such outbreaks will only accelerate. These factors should therefore motivate executives to consider the appropriateness of their firm’s resilience plan for the next pandemic.

CR: What steps can be taken to prepare for the next pandemic?

The monetary impact on business of Covid-19 manifested itself with a steep decline in top line revenues, significant increase in balance sheet indebtedness, the incurring of extra expenses to create Covid-safe operating environments and large-scale staff retrenchment as executives took swift action to manage the underlying cost base. The absence of an integrated risk solution meant fi rms had to navigate the stressed economic environment reactively, rather than being fully prepared with ready access to a meaningful pool of liquidity and supplemented with crisis management assistance provided by industry experts helping executives to bridge the peak of the outbreak. To that end, Munich Re’s epidemic risk solutions team has partnered with International SOS to merge our core competencies in a solution now available to captives, enabling the implementation of an appropriate risk programme of self-insurance, risk transfer and crisis management response. The risk-transfer solution is both flexible and broad in its cover, providing the insured with a fungible pay-out that can be used to mitigate economic loss, cover a firm’s fixed costs, pay for extra expenses to keep the business operating or put towards key staff retention.

CR: Can you tell us more about how the parametric solution works?

Using the World Health Organisation’s (WHO) declaration of a Public Health Emergency of International Concern (PHEIC) under the International Health Regulations and Civil Authority restrictions (local and federal), a non-damage business interruption insurance has been created that uses parametric triggers that are freely observable to the insured. The triggers follow what we call the when, what and where.

  • When: The emergence of a new outbreak is captured by the announcement of a disease outbreak news by the WHO. In the case of the Covid-19 pandemic, a disease outbreak news was issued on 5 January 2020.
  • What: If an outbreak subsequently develops to a scale that the WHO considers “an extraordinary event which is determined to constitute a public health risk to other States through the international spread of disease” a Public Health Emergency of International Concern (PHEIC) is formally declared. This declaration is a call for global cooperation and for countries to strengthen their preparedness. For Covid-19, a PHEIC was declared on 30 January 2020.
  • Where: The final trigger for the policy is that the disease should impact the selected geographical locations of the insureds business model with the introduction of a local or federal Civil Authority Restriction that impedes the ability to operate on a business-as-usual basis.

Once the triggers have been met and a business can show it has been impacted economically, the policy allows for a quick liquidity pay-out, using an affidavit process that avoids a protracted claims adjustment process. This provides funds that can be used when and where they are most needed, coupled with expert support from International SOS to assist strategic decision-making in a fast-evolving situation.

CR: Which industry sectors would you say have purchased parametric risk transfer solutions?

To date, the risk-transfer solution has been purchased by insureds in the manufacturing, healthcare, education, banking, pharmaceuticals, events and public sector. In a number of instances, the policy has been implemented utilising a company’s captive with the company retaining a level of self-insurance and reinsuring the rest. This approach can be attractive to the insured allowing them to share the underwriting outcome with the market provider as they build up their reserves in anticipation of a future pandemic.

The motivations to buy the solution range from evidencing to key stakeholders that the company has taken tangible action to enhance the firm’s governance due to the Covid-19 pandemic, to a desire to further its social responsibility objectives, notably regarding their employees. In this way, the implementation of such a solution aligns well with the insureds broader ESG targets.

International SOS Covid-19 in action

During a pandemic, the amount of information can be overwhelming, therefore, in a fast-evolving situation, credible expertise is critical for strategic decision-making. International SOS supported many such organisations throughout Covid-19.

Corporate crisis management teams have had the benefit of health leadership and independent medical opinion driving decision-making by translating scientific evidence into actionable insights. This enabled risk, HR and HSE professionals to communicate company public health recommendations more confidently to C-suite decision-makers. This also had the benefit of both direct and indirect savings. For example, a large multinational financial services firm arranged 66 crisis management calls in a nine-month period – each call had the benefit of a medical advisor to lead on the health aspects, with the resulting meetings saving hours of management time.

On direct savings, an HSE director in the manufacturing industry was about to secure over a million dollars’ worth of masks which were not fit for purpose. His clinical advisor was however able to step in and recommend a more appropriate mask that was effective against Sars-CoV-2, thereby saving substantial direct financial outlay on inappropriate health resources.

In conclusion

A wealth of epidemiological data informs us that epidemics and pandemics will emerge with ever greater frequency and the impacts will be more severe.

The introduction of an ex-ante risk-transfer solution can be used to support the execution of a company’s resilience plan and provide the platform for an accelerated recovery. Munich Re and International SOS have combined their knowledge and experience of risk management and insurance to develop an integrated epidemic and pandemic risk management policy solution. With access to online pandemic resources and expert health assistance advice together with financial support when needed the most, this combined proposition puts the insured in the best shape possible to navigate the next crisis. By proactively addressing risk, future-proofing an organisation’s pandemic response, organisations can therefore contribute to an enhanced duty of care and ESG agenda, retaining and protecting talent, ultimately protecting business, shareholder value and reputation.

12 August 2024
5-6 November 2025

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