There is precedent for the establishment of a government-led backstop to certain catastrophic loss scenarios. The public-private partnership model is one that has worked particularly well for more established risks that are capable of causing systemic economic shocks. The terrorism market serves as a fine example of how the security of central government backing can mitigate the withdrawal of (re)insurance capacity following significant events and facilitate the growth of a private market that is both resilient and innovative, according to a recent Reactions article by Peter Hearn, President and CEO of Guy Carpenter.
Several pools around the world provide backstops for terrorism events, particularly for perils where systemic risks lie. This has largely been their purpose since their respective creations and governmental involvement remains imperative, given that private market capacity alone is not sufficient to cover (for example) catastrophic nuclear, biological, chemical or radiological (NBCR) events in large cities. The modeled loss of USD 800 billion for a nuclear bomb detonation in New York City is testament to this. Certain pools have gone even further recently and taken bold steps to narrow protection gaps by extending coverages to include new risks such as cyber. Over time, this is likely to stimulate further competition in the private market and increase the supply of new forms of cover.
Calm before the systemic storm?
This is a model the (re)insurance sector could follow for pandemics and other systemic perils more generally. Such agility may be needed for major natural catastrophes, as trends associated with climate change and globalization combine to complicate and enhance the magnitude and scope of loss potential.
The diverse and dispersed events over the last three years show that carriers and governments need to be prepared for higher levels of catastrophe loss potential in the future, as climate change and the continued appeal of living in areas exposed to weather-related risks influence the frequency and severity of events.
Impacts will inevitably be amplified in the event of a “super natural catastrophe”. What would the consequences be if a powerful earthquake or a major hurricane or typhoon were to strike near a global manufacturing hub today? Should we expect (unmodeled) national or even global ramifications that could potentially disrupt supply chains, hit financial markets and lead to business interruption or higher unemployment far beyond the point of occurrence?