Any hope of a workable insurance solution for a future pandemic will need to be based on a “series of trade-offs”, according to one leading broker.

Christopher Croft, (pic) CEO of broker body LIIBA, said there will need to be compromises on both sides if a private/public solution to provide cover for a future pandemic was to be created.

Speaking to members of South Africa’s Financial Intermediaries Association online Mr Croft explained that the private sector alone lacked the capacity necessary to protect businesses against the impact of a pandemic, so a public sector backstop was required. However, governments needed the involvement of the private sector in order to minimise the cost to the taxpayer and enhance the flow of funds.

“In the UK, annual turnover of SME businesses is £2.2 trillion, which is beyond the scope of the insurance industry to cover, hence the need for a public backstop,” he explained. “But the incentive for governments to participate is that any private participation in the schemes will lower the bill to the public purse – and, as they will hopefully realise, the insurance compensation process is a far more efficient means of getting money to the right people fast than bank loans.”

Mr Croft stressed that the design of the solution and its triggers were critical to maintaining a balance of public and private sector involvement. He said: “If you define the circumstances in which you expect claims to be triggered reasonably tightly, then you have greater scope for more accurate modelling which, in turn, creates greater insurer confidence, thus expanding the private sector’s role. But the risk is that you define away the cause of the next crisis. So, should these be pandemic-only solutions or are they better to be loosely defined black swan event cover?”

The question of what precisely would trigger payment of such an insurance solution was also significant.

“An automatic trigger – say a government declaration of an emergency or a trigger based around some index of emerging economic and societal loss – will get payments to people quicker than if they have to establish an actual loss,” explained Mr Croft. “But it may not get the right amounts to the right people and thus be a less effective response.

“Similarly waiting to establish an actual loss will delay payment but make it more accurate, whereas basing payment on a proxy like a percentage of a firm’s costs will make the process quicker but may mean some are not sufficiently compensated to survive.”

Mr Croft acknowledged that the pandemic and the industry’s response had impacted on its reputation with clients across the world.

“The reputation of insurers has not been enhanced by their response to some pandemic claims,” he said. “Designing insurance solutions to systemic risk that have a chance of responding better to future events may go some way to repairing that.”