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Jul 05, 2020

Lloyd's proposals for an insurance industry response for supporting global recovery and resilience

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Lloyd's has issued a white paper in response to the COVID-19 crisis and in preparation for future systemic risks. It proposes several solutions that could offer customers greater protection against a future wave of the COVID-19 pandemic or against future systemic risks.

The paper also outlines additional ways in which Lloyd’s and the global insurance industry could respond to protect customers. Lloyd's drew upon the expertise of global CEOs as well as of those in London.

The report is set out in five chapters which we have summarised below. The full report is available here from the Lloyd's website.

A Pathway to Recovery

Insurance cover is essential in the absence of a vaccine as a "pathway to recovery" for most businesses and is expected to be significant. Any subsequent recurrences of Covid would cause a serious setback to this recovery. In order to address the short term requirements of customers, Lloyd's is working on a product called ReStart that involves a pooling of Lloyd's capital to provide some of the capacity required to cover a second wave and so help ensure business resilience to a second wave. It will be aimed initially at smaller businesses. No Government support involved.

Building greater resilience

Separately, to address customers' medium term needs for cover against future pandemics and other systemic risks, Lloyd's has proposed as a framework a solution called Recover Re which would (have to) be a government backed vehicle providing long term insurance after the event of a second wave of Covid-19 and other future pandemics. Premiums would be paid over the long term in order that insurers can recoup claims paid.

Protecting the future

Looking at the long term, whilst the threat posed by systemic risks has been brought to greater prominence, customers will probably not be able to afford to purchase protection for events such as the following:

  • future major public health emergencies caused by pandemics and animal disease;
  • natural hazards such as solar eruptions and accelerated climate change;
  • telcoms and utilities failures causing widespread disruption, supply chain failure, cyber attacks.

The insurance industry itself cannot afford to cover the large economic and societal losses which go with these potentially very severe systemic risks as these would exceed its financial resources. As Lloyd's report says: "Their impact requires resources that can only be accessed by governments, with response and recovery requiring international and cross industry collaboration. The aftershocks from these events mean the human and economic impacts can take years or even decades to fully recover from."

Lloyd's has proposed as a framework a public/private partnership solution called Black Swan Re whereby the insurance industry provides initial cover and Governments act as a backstop. Other insurance solutions such as pandemic pools are being worked upon as discussed in our June newsletter.

Next steps

"There is now an urgent need to develop these ideas further – alongside the many others under way in other parts of the world – so we can quickly provide customers with the protection they are asking us for and can play our part in strengthening society’s resilience more broadly.

"Delivering these initiatives at the pace and scale needed to help customers and wider society will require close collaboration between the insurance industry, governments, customers, and, in some cases, the capital markets and non-governmental organisations.

"They will also take time to develop (i.e. ReStart 2-3 months; Recover Re 3-6 months; Black Swan Re 6-12 months) so will require the industry working independently, and with governments, to get started immediately.

"For its part, Lloyd’s will provide seed funding of up to £15m to support this process, and use its marketplace to act as a convenor and incubator to
develop some of these initiatives.

Lloyd's Product Innovation Facility and Lloyd's Innovation Lab are both involved in fast pacing ideas relevant to the new normal that we all find ourselves in post Covid.

The advisory groups are listed on page four of the white paper.