Insurers Urge Gov't Caution Over Pandemic Insurance Fund

By Martin Croucher
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Law360, London (February 11, 2021, 2:01 PM GMT) -- Insurers have called for the government to carefully consider whether there is a need for a state-backed fund to offer insurance to businesses that are unable to buy commercial cover during the coronavirus pandemic.

The government should consider the challenges and cost of establishing a pandemic equivalent to the U.K. storm insurance fund, Flood Re, James Dalton of the Association of British Insurers said on Wednesday.

Pressure is growing for the government to introduce a state-backed "Pandemic Re" that would provide specific insurance to businesses forced to close in future nationwide lockdowns. Many insurers have introduced sweeping policy exclusions for COVID-19 or other pandemics, creating what regulators have described as a growing "protection gap" as cover is withdrawn.

Dalton, director for general insurance policy at the ABI, said that creating a government-backed reinsurer is not necessarily the right answer. The bar for establishing such a scheme should be set high, he added.

"There should be a genuine market failure, where no other public policy intervention could solve the underlying problem," he said.

The ABI director said the government should weigh the potentially "astronomical" costs of stepping in to protect businesses after the pandemic against the long-term costs of funding such a scheme.  

"The key question is whether government intervention after the event is preferable to establishing a government-backed scheme before the event, which builds up huge reserves and is potentially unused for years, if not decades," Dalton added.

Dalton said those questions would be considered by the government's newly-established Contingent Liabilities Group. A spokesperson for the group did not immediately respond to a request for further details.  

UK Government Investments, an organization under HM Treasury, advertised last month for a director of the liabilities group, a newly-created team which it said would look at "risk pooling arrangements" for the government. A spokeswoman for UKGI did not immediately comment on whether it is considering a pandemic reinsurance fund. 

Pool Re established a committee of industry executives in 2020 to examine the possibility of creating a pandemic reinsurer that would operate in a similar way to the state-backed terrorism reinsurer. 

Pool Re provides subsidized terrorism insurance to U.K. businesses. It is funded by insurance companies and backed by a government guarantee to pay if it runs out of cash. It holds a fund of £6.6 billion ($9.1 billion) from members' contributions.

A report by the Pool Re committee was submitted to HM Treasury in August last year but the government has issued no official response.

--Editing by Ed Harris.

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