Dr. Gunther Kraut, head of Epidemic Risk Solutions at Munich Re, discusses the current state of the pandemic insurance market and what can be expected for the future. He says one of the challenges of developing this market, aside from managing accumulation risk, has been the education process required by the potential insured.
Did Munich Re have any pandemic insurance solutions prior to the crisis?
Munich Re established a dedicated team, "Epidemic Risk Solutions" (ERS) in 2017 (to our knowledge the only major insurer with a dedicated epidemic risk unit) in order to make societies and economies more resilient against epidemic outbreak risk.
Prior to COVID-19, pandemic insurance did not appear to be widely available or advertised. Why was this?
While evidence suggests that outbreaks are occurring with ever greater frequency and economic impact as a result of environmental shifts such as deforestation, urbanization and global mobility, epidemic insurance is not a commodity product. It's very complex to calculate and requires a lot more market education than well-established insurance products.
Are there any other reasons why businesses would not have purchased pandemic insurance prior to the coronavirus outbreak?
The challenge of developing this market, aside from managing accumulation risk, has been the education process required by the potential insured party. Prior to COVID-19, the risk exposure to individual companies was underestimated.
Will the demand for pandemic insurance increase because of the COVID-19 pandemic? What will be the future of pandemic insurance at Munich Re?
The demand for our non-life ERS products was muted prior to COVID-19. This has significantly changed during the current outbreak. As this is a relatively nascent market, it's too early to speculate on the future potential size, but Munich Re believes this to be a scalable opportunity, which was a key consideration in the Board of Management making the decision to create the Epidemic Risk Solutions unit in 2017. Munich Re made the strategic decision to position itself at the forefront of the industry's response to the challenges of insuring epidemic risk.
What is the typical cost of pandemic insurance?
We would highlight that epidemic risk insurance is not necessarily more expensive than other lines of insurance, but of course pricing needs to be risk adequate, reflecting both expected loss and accumulation risk management effort. The concrete premium depends highly on the precise risk insured and the covered area. However, it may be that before the occurrence of COVID-19, many institutions considered their epidemic risk exposure lower than what historical event data and pricing base indicated. The general risk perception will likely have changed now.
The demand for insurance also may be stimulated by entities such as rating entities or lending banks requesting such covers to be in place, in particular for investments in certain geographical areas. Combining different financing tools may also contribute to structure risk mitigation in an economically efficient way.
What are some examples of typical policy wordings that would feature in pandemic insurance policies?
Generally, the ERS offering spans across all lines of business, including non-life insurance, life reinsurance and public sector products. This is due to our approach to accumulation risk management, which is a prerequisite for this offering. Hence, there is not one typical policy wording. However, on the non-damage business insurance side, wordings for certain industry sectors and product features are more standardized. Still, all ERS products / coverages are tailor-fit to the needs of the respective insured and therefore confidential.
Which sectors does Munich Re ERS address?
The current focus is on solutions for corporates from sectors like retail, hospitality, manufacturing and others.
Dr. Gunther Kraut, head of Epidemic Risk Solutions, has been with Munich Re for 12 years, structuring Munich Re's first pandemic risk retrocession program in 2013. Later on, he initiated and co-led the Epidemic Risk Business innovation project, which was then transformed into a business unit with both pricing and underwriting responsibility and a global mandate. Gunther holds a diploma degree in financial mathematics from the Technical University of Munich as well as a business degree from LMU Munich. Subsequently, he obtained a PhD in risk and insurance with a research focus on extreme mortality risks such as pandemics.