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Lloyd’s promotes virus, black swan plans

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Lloyd’s has distributed suggested models for covering COVID-19 risks and future black swan events to Australian insurers and governments as part of a global initiative to drive solutions.

The London-based marketplace consulted with advisory committee members, other industry participants and customers to compile a report outlining three frameworks for extending coverage for pandemics and other large-scale risks.

The proposals, labelled ReStart, Recover Re and Black Swan Re, focus on immediate issues as businesses affected by lockdowns face fears of further impacts, as well as unknown longer-term risks.

Lloyd’s Australia GM Chris Mackinnon says Lloyd’s has shared the report with insurers operating in the local market as well as with governments at all levels, and more widely, as it contributes its global expertise and perspective to addressing issues highlighted by COVID-19.

“We would hope that we are able to get a working group together to collaborate and work out what we as a collective body can do to try and create some of these solutions,” Mr Mackinnon told insuranceNEWS.com.au.

Organisations Lloyd’s has contacted include the Insurance Council of Australia (ICA), which is working with actuarial consulting firm Finity on options to provide future pandemic coverage.

Mr Mackinnon says Lloyd’s is well-placed as an industry leader to facilitate conversations as countries have been challenged by a pandemic that requires high levels of government spending that are beyond the resources of the insurance industry alone to cover.

The report says the global insurance and reinsurance asset pool is estimated at $US2 trillion ($2.87 trillion), while government fiscal support packages in response to the pandemic totalled $US9 trillion ($12.9 trillion) as of May. They could reach $US15 trillion ($21.5 trillion) by the end of the year, according to the International Monetary Fund.

“It is really important that we engage with governments and sovereign funds, to work in partnership to create some solutions going forwards,” Mr Mackinnon said.

The Lloyd’s ReStart proposal, which focuses on non-damage business interruption cover for SMEs seeking protection against a second COVID wave, is already being developed with an initial focus on the UK.

“As that develops we will also be looking to try and model that in other territories and other areas where we think it will have application, and/or benefit,” Mr Mackinnon said.

Recover Re is a proposed government and industry open framework to provide immediate relief and cover for non-damage business interruption cover, including for the current pandemic.

The “after-the-event” insurance would allow a retrospective immediate cash injection for a targeted portion of SMEs hit by losses, with payments recouped by insurers over the long-term, supported by a government credit-risk guarantee.

The Black Swan Re framework could provide reinsurance for commercial non-damage business interruption cover for future system risks through pools backed by a government guarantee to if funds where the pool is insufficient

Mr Mackinnon says the proposals build on approaches already used in insurance markets, such as terrorism pools, and the work is underpinned by reforms underway to make Lloyd’s more flexible and innovative.

Lloyd’s says it is developing a centre of excellence, supported by up to £15 million ($26 million) in seed capital investment, to build capability to better understand, model and create products to address systemic risk, including pandemics.