UK industry presents plans for Pandemic Re to HM Treasury

The UK insurance industry has recently submitted a range of ideas to HM Treasury which, amongst others, proposes a new, Government-backed reinsurer to cover the thorny issue of non-physical damage BI losses in a bid to make the domestic economy more resilient for future pandemics.

It is thought that last month, members of the Pandemic Re steering group presented their initial findings to representatives of HM Treasury, including the former McKinsey partner and senior British civil servant Charles Roxburgh, The Insurer can reveal.

The steering group – which was established by (re)Insurance entrepreneur Stephen Catlin in April 2020 and has attracted a broad consensus of support from the domestic industry – has yet to publish its findings as they remain at the ’ideas’ stage.

However, The Insurer understands the group has recommended a number of alternative solutions including utilising part of the reserve funds accumulated in the terrorism mutual Pool Re to support Pandemic Re, a new reinsurer that would provide pooled reinsurance cover to UK commercial insurers and which would be financed by an adjustable premium dependent on cover ceded to the reinsurer.

The proposed Pandemic Re would also benefit from a government guarantee with the broad objective of ensuring the private market retains as much risk as possible. In contrast to Pool Re – which operates under the same principle for terrorism cover – UK insurers would have greater flexibility in how much risk they cede.

The group’s suggestions also include developing a separate platform to provide capped BI cover for SME businesses, a current flashpoint between the industry and its customers which has sparked a myriad of legal disputes across the globe and has even prompted the UK regulator FCA to intervene by way of a High Court test case.

The Insurer understands the steering group is recommending a capped payment to SME businesses which will be based on pre-determined, binary triggers including government-mandated lock downs measures caused by a pandemic.

Later this month, the UK High Court is expected to hand down its decision in the unprecedented FCA test case, which saw the industry regulator sue eight UK carriers in a bid to bring clarity over wordings and how the industry should calculate BI losses. The regulator has estimated 370,000 SME policies may affected by the verdict. If the average limit is £25,000 then it equates to nearly £10bn of BI losses that depend on the decision.

Some predict the average policy limits may be greater. Indeed, writing in this publication in July, an experienced BI lawyer Damian Cleary even warned that if the FCA succeeds in the entirety then “insurance insolvency will loom large on the horizon and treaty reinsurers had better watch out”.

Although the greater challenge will be engaging a hard-pressed UK government to focus on future pandemic solutions when it is currently focused on the present, producing a report backed by large swathes of an often divided UK industry is an impressive achievement.

After creating a steering group with representatives from the ABI, Allianz, Aviva, RSA, Pool Re and the industry’s three largest reinsurance brokers, the body has expanded to over fifty industry individuals, created six working groups and the support of Lloyd’s, consultants and law firms all operating on a pro bono basis. Lloyd’s/ London market veteran Michael Dawson (pictured) plays a key role as chair of the project committee working closely with Catlin.

While a spokesperson for the group declined to comment on the status of the report, he did confirm that it expects to negotiate directly with HM Treasury and the UK Government.

The Conservative politician and former Home Secretary Amber Rudd was selected as one of the six working group leaders as head of the Legal, Regulatory and Government Affairs group.

The Insurer comment:

Uniting the industry and producing a series of recommendations that have been modelled and actuarially-assessed in a space of months is an impressive achievement. However, the next challenge may be the toughest yet: engaging the UK government to support its execution and delivery at a time when it is consumed with managing the myriad of economic, social and political challenges that have sprung from the pandemic and its lock-down measures.

The Insurer has been critical in the past of the UK industry’s flatfooted response to the issue of BI losses suffered by small businesses. This is unlikely to have generated much goodwill in Downing Street (or with the industry’s customers) and nor would the more recent, attempted £1bn raid on the Pool Re piggy bank likely have helped the industry’s standing with the occupants of Number 11 Downing Street.

But the UK economy depends on SME businesses being confident that they will be supported next time there is a pandemic.

The Government also has a vested interest in improving the country’s economic resilience and insurers obviously have a key role in providing their risk assessment and loss mitigation expertise in a partnership, together with some sharing of risk.

In other words, there is an alignment of interest in partnering together.

So, fingers crossed the UK Government engages positively after all the positive work by the Catlin group rather than the report getting lost in the Government’s intray…