June 12, 2020

Germany considers cat bonds to support pandemic risk fund: Reports

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The insurance and reinsurance industry in Germany has reportedly come together to discuss and strategise the launching of a EUR 10 billion pandemic risk fund, to provide risk capital in the event of future pandemics, with insurance-linked securities (ILS) one of the funding avenues being explored, it has been reported.

First reported by German newspaper Der Spiegel this morning, followed by Reuters, the initiative sees collaboration from insurance and reinsurance stakeholders in the country.

We understand that participants are seeking a public-private solution and are realistic enough to acknowledge that re/insurers alone cannot provide the private capital such a risk fund or pool would require.

As a result catastrophe bonds are being discussed, as part of the early explorations being coordinated by German insurance industry association the GDV.

The moves join other international initiatives to establish pandemic risk insurance backstops and risk pools, to provide extra capacity to ensure pandemic risk protection can be more all-encompassing and responsive should future pandemic outbreaks arise.

The German initiative is quite forward-thinking, it seems, with participants suggesting that in order to protect against the risk of future pandemics, a coordinated response by government, the insurance and reinsurance industry, as well as the capital markets is required.

The reports call for a fund of EUR 10 billion or more, with the remit of the fund for pandemics specifically, but also perhaps for other large catastrophic events as well.

It seems there is a dawning realisation that when peak catastrophe events occur, the capitalisation of the insurance industry alone may not be sufficient and the onus should not be solely placed on the taxpayer via the government.

A working group has been written by industry participants, under the guidance and coordination of the GDV, that calls for financing for the risk fund or pool to come from businesses, the insurance and reinsurance industry, the government and also from issuance of catastrophe bonds to underpin the risk capitalisation of the fund.

Our recent survey revealed that the majority of the hundreds of respondents to it said that they believes a pandemic backstop facility of any kind should factor in instruments from the ILS market, such as cat bonds, as a way to secure the necessary funding such initiatives will need.

With some of the initiatives seen underway in the U.S. and UK calling pandemic risk uninsurable, it’s refreshing to see an initiative that acknowledges the insurability of the risk, but that the capacity of the insurance market is not sufficient on its own and that taxpayers should not be the only ones taking the burden.

The capital markets and ILS investors have the depth of liquidity and capital needed to absorb certain return-periods of these peak risks and exposures, while also enabling risk to be diversified into the deepest pool of capital available, at the right risk levels and price.

It will be interesting to see whether this German initiative, which is in its formative stages, gains traction or not.

To read more articles like this one, visit Artemis.

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