If you ever played Tetris during the 80s or 90s, when the game took the world by storm, you knew that no matter how good you got at it, the game would eventually get the better of you. You started off by neatly stacking your basic blocks, but as the speed of the game picked up, your screen soon got filled with mismatched blocks that didn’t fit and it began to dawn on you that you just crossed that point of no return. Before you knew it, it was game over.

The speed at which Tetris kept throwing those blocks at you, made it impossible to manage. The Covid-19 pandemic entered the stage in a somewhat similar fashion. It was an epidemic as it emerged. Like many we’ve seen before, we thought of it initially in local terms, as something manageable. We soon realized that it was spreading too fast and at dire consequences. It didn’t take long before it became a pandemic. The word itself comes from Greek (‘pan’ meaning all and ‘demos’ meaning people). It spread fast and worldwide and was an outbreak that paralyzed and harmed our health, families, countries, and economies. Many businesses went bankrupt and as a result, many people lost their jobs.

Unlike Tetris, thankfully, it is possible to manage. However, what it highlighted are the enormous challenges that are involved in insuring it. In addition, it also opened up new paths to future insurance solutions that could cover such global events of enormous proportions.

The way insurance usually works is that many people pay in a comparatively small premium so that a few affected get a lot of money when a loss happens. But the fundamental mechanism of risk pooling and redistribution fails to work when a systemic risk is present the effects of which are felt throughout the economy, as is the case with the pandemic. Pandemic-induced property and business continuity risk is unique given its potential to impact almost all policyholders simultaneously and over an extended period of time.

When talking about pandemics and insurance, we often hear the phrase protection gap. A protection gap is the share of uninsured losses in total economic losses. Because of its systemic characteristics, the insurability of pandemics often focuses on commercial P&C business, business interruption (BI) and business closure protection gap, in particular.

To put things into perspective, according to the Geneva Association’s recent report, P&C insurers globally generate an annual premium income of about $1.6 trillion, while the global loss in GDP is estimated to amount to $4.5 trillion in 2020.

P&C insurers would have to collect $1.6 trillion across all lines of business for almost 3 years in order to cover the estimated GDP loss for 2020. In addition, only a tiny fraction (estimated $25-30 billion) of the world’s P&C premium base is linked to BI coverage. The global P&C insurance industry would have to collect BI premiums for at least 150 years in order to absorb the estimated global output loss from the pandemic.

To illustrate things further, losses associated with a hurricane, for example, are local and dissipate over hours or days. Pandemic-induced BI losses have the potential to impact all policyholders, regardless of their location and at the same time, covering a stretch of months or even years.

In addition, the economic severity connected with a pandemic depends on a particular government’s response to the pandemic. Such economic losses, linked to politics and political decisions, are difficult to model and measure.

Of course, many solutions are conceivable in order to close this protection gap—including the states organizing insurance on their own. However, it would certainly make sense to develop an overarching approach in cooperation between the insurance industry and the respective state. The reason is twofold: insurers know how to make payouts quickly and smoothly. In addition, existing customer relationships facilitate identity verification.

This is something that Allianz SE Board Member Klaus-Peter Röhler reiterated in his op-ed published recently in VersicherungswirtschaftHEUTE.

Joint discussions between the insurers and the governments have prompted four key questions that need to be addressed: which insurance model is the more appropriate solution—the capital collection model or an insurance model? Should such a coverage system be voluntary or compulsory? What is the appropriate trigger to bring this system into effect? And finally: should a solution be European or national in nature?

"This approach might be embedded within an overarching European framework of minimum standards for all Member States—which would certainly make good sense in view of how closely intermeshed European economies are with one another. But then, implementation should take place at the national level and must be adapted to each country-specific context. After all, laws to cushion the consequences of a pandemic, such as Germany's provisions for government-subsidized shortened work schedules, differ from one country to another," says Röhler.

Allianz sees its role in flexibly approaching and supporting the model each country chooses because the insurance industry has the expertise and the resources to manage payouts. "So at Allianz, we're flexible about approaches so we can provide each government with the best possible support in carrying out its own chosen model. What's important is that the government and the insurance industry should quickly find a way together that leads to our goal of offering clients meaningful support fast during the next pandemic," added Röhler.