Covid-19 has pushed the theme of ‘systemic risk’ to the top of the agenda for risk managers, insurers, and large corporates all over the world. For insurers, the term has become synonymous with the phrase ‘uninsurable’, and it is common to talk about climate change, large cyber-attacks, and of course pandemics as being ‘systemic risks’ which defy the oft-quoted principle of ‘the premiums of the many paying for the losses of the few.’
The topic is also at the forefront of governments’ agendas as they seek to ‘build back better’ from the disruption and tragedy of the last 18 months. There is, however, a small but important difference in the terminology being used. In the context of building resilience, recent literature and policy emerging from the UK Government, for example, does not refer to ‘systemic risks’ but rather to ‘systemic consequences’ or ‘systemic vulnerabilities’.
This may seem like only a semantic difference, but is indicative of a widening gulf between how insurers think about risks – on a peril-based or event basis – and how society expects to be protected from the sweeping impacts of today’s dizzyingly complex and interconnected risk environment. Indeed, this difference goes to the heart of the watershed proceedings brought by the FCA against insurers on behalf of policyholders claiming business interruption losses during the pandemic last year. In ‘satisfying the test of causation’, semantic imprecisions in policy wordings proved pivotal.
That the cover was confirmed by the financial services equivalent of a TMO does not disguise an unholy trinity of ‘gaps’ posing serious challenges to the long-term viability of traditional insurance practice and models: consumer perception gaps in what they believe they are insured against and what they are actually insured against; the trust gap this divergence gives rise to; and a widening protection gap showing that year on year, the indemnified proportion of the real economy is diminishing.
There is no silver bullet to bridging these gaps, but developing new products and partnerships able to address the unprecedented expectations and needs of businesses in a post-Covid world will be critical for the industry in the decades ahead.
In March 2021, the UK Government published its Integrated Review. Included was the statement that, “As the world becomes both more interconnected and contested, incidents in one region – a novel virus, the loss of habitats or a cyber-attack – can have systemic consequences worldwide, which we cannot always predict or avert.”
One of the review’s key commitments was to ‘start developing a comprehensive national resilience strategy in 2021’, and in July, the Cabinet Office issued a consultation which ran for around ten weeks. Two key aims of the prospective strategy are to:
- Reduce the impact of acute shocks, including low-probability and catastrophic events, by establishing a ‘whole of society’ approach to resilience.
- Enable investment in the UK’s capability to address the common causes and impacts of risks, and systemic vulnerabilities.
This emphasis on effects builds on work throughout 2020 and 2021 by the Lords Select Committee on Risk Assessment and Risk Planning, and the National Preparedness Commission, which made its own consultation submission. These and other bodies are engaged in pivoting the UK’s approach away from planning for individual risks on a causal basis towards preparing for the impacts of the next systemic crisis on a risk-agnostic basis.
Is there a role for insurance in this approach, given both the industry’s reliance on causal triggers, and the capital implications of losses associated with events such as Covid-19? To try to answer this question, Pool Re convened Re:New, a group of leading academics, risk and security professionals, and former ministers. In its response to the consultation, the group emphasised the pivotal role the industry could play not only in sharing underwriting risk with the Government as it has done for terrorism and flood, but in providing expertise on risk management for catastrophic events and incentivising ‘skin in the game’ for such events by businesses, communities, and individuals.
Re:New’s ongoing work with Cambridge University is exploring how a ‘Catastrophic Risk Partnership’ between the UK Government and the insurance industry could ensure rapid and predictable liquidity is available to arrest the common impacts of future crises, as well as provide information and incentives for policyholders to reduce their vulnerability pre-crisis.
The feasibility and appropriate design of this framework, and similar frameworks being explored continentally such as FERMA’s ‘EU Resilience Framework for Catastrophic Risks’, are of course premised on buy-in from politicians. But in the UK, a developing orthodoxy in the public sector for orientating national resilience around systemic impacts and vulnerabilities rather than individual risks presents insurers, risk managers, and policymakers with common cause to consider expanding the role of pooling – and a valuable opportunity to close ground on the ‘gaps’ that only look like widening without a change of tack.