Cedric Stephens | Planning for future crises

ADVISORY COLUMN: RISKS & INSURANCE

This newspaper’s June 17 editorial argued that unemployment insurance should be put on the national agenda.

It said: “The recession wrought by the COVID-19 pandemic makes the issue not only topical but underlines its logic.”

In marshalling the evidence to support that argument, the editorial listed the impacts of the virus. They include the decline in economic output, gross domestic product, by six per cent or more (the recession); the sudden closure of many businesses; the loss of thousands of jobs, some of which may not return; and the absence of a formal safety net for unemployed workers.

The leader’s proposed remedy was narrow and unbalanced. It tilted towards labour. No solutions were offered for the disruption of business activities. The immediate concern was the potential impact on struggling firms after the expiry of furloughs if companies have not recovered sufficiently to afford significant numbers of their employees. A longer-term issue was what support, if any, should be available to unemployed people, and how such a system might be structured.

Broader and, in my opinion, other relevant issues were ignored. For example, what are some of the important lessons that were learned from COVID-19? Also, can measures be put in place to minimise the impacts of future pandemics? Today’s piece will seek to answer the latter question.

Section 13 of the Financial Administration and Audit Act, 1959, created a Contingencies Fund. Its aim was to pay for “unforeseen expenditure” incurred by the Government. Chapter VIII, Section 118, of Jamaica’s Constitution, three years later, authorised the minister of finance to make advances from the fund.

Contingency funds

Some $6 million of the earlier allocated $100 million was advanced at March 24, 2019. The next day, the fund ceiling was raised to $10 billion. The economic cost of Hurricane Gilbert, in contrast, was estimated at US$4 billion.

When the fund ceiling was raised, $2 billion was transferred, with the promise of future transfers. The increased allocation was “specifically provided for the possibility of natural disaster”, according to a finance ministry release. Were the pandemic risk and its impacts on the economy overlooked last year when the raising of the ceiling in the Contingencies Fund was being discussed?

If the island does not develop and implement a plan to deal with the effects of future pandemics and natural disasters, it will continue to face even more economic disruptions in the years ahead.

Private insurance companies in other countries have already started to think about how to make their economies more resilient to the effects of global pandemics. Jamaican insurance companies should do the same. Der Spiegel, the weekly German news magazine, reported recently that insurers there “are putting together plans for a multibillion-euro public-private fund to help companies deal with business interruptions from future pandemics”.

A working group of that nation’s major insurers released an initial discussion paper that determined that the fund needs to have a volume of more than €10 billion (US$11.32 billion). The pot would serve as “a quick liquidity help” until government emergency measures could be hammered out.

The report said the fund would be financed by contributions from potentially affected businesses and insurance companies, as well as through catastrophe bonds and government coffers. The insurers outlined two possible models: one would be obligatory with flat-rate contributions, while the second would be voluntary, and contributions would be based on the companies’ payout goals.

The magazine report reminded me of the formation of CCRIF SPC, formerly the Caribbean Catastrophe Risk Insurance Facility, in 2007. It was set up to limit the financial impact of natural hazard events by providing “short-term liquidity support” to Caribbean and Central American governments when insurance policies are triggered.

Risk pool for pandemics

CCRIF was the world’s first multi-country risk pool. Isn’t the time now ripe for us to be thinking about a ‘Caribbean Pandemic Risk Pool’ in order to prepare for the pandemics to come and protect our fragile industries and economies from harm?

Before the September 11 terrorist attacks in the United States, insurers generally neither charged for nor specifically excluded terrorism coverage. The scope of the 9/11 attacks and the resulting US$40-billion estimated insured loss changed perceptions. It was the worst terrorist attack on record for deaths, property damage, and business disruptions.

The Terrorism Risk Insurance Act, TRIA, created a federal "backstop" for insurance claims related to acts of terrorism. TRIA "provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism”. The statute, which was originally set to expire December 31, 2005, was extended on several occasions. It is now scheduled to expire on December 31, 2020.

One US lawmaker is planning to use the TRIA model to make pandemic coverage available to insurance buyers and help make the US economy more resilient to future viral flare-ups. Politico reports that insurers would offer pandemic coverage in exchange for the government agreeing to cover a portion of their potential losses.

The US Treasury Department would step in to pay once the industry suffered a US$250-million loss. The US government would then be able to help cover up to US$750 billion in losses per year. The programme would be voluntary for insurers, though they would be required to offer pandemic protection in their policies if they chose to participate.

The head of the United Kingdom’s insurance lobby, the Association of British Insurers, advocates public-private-sector cooperation in relation to insurance for future pandemics. He said recently that partnerships between governments and insurers to solve big problems are nothing new, that “schemes exist around the world, most commonly for flooding, terrorism, and earthquakes …. In the UK, we have Flood Re, as well as Pool Re, while other examples include the California Earthquake Authority, the CRC in France, and the Earthquake Commission in New Zealand. Each is structured with different levels of state involvement, but all seek to enable insurance protection for risks that would be uninsurable”.

Safeguarding the local economy from future shocks like another COVID-19 and from the effects of natural disasters and significantly reducing Jamaica’s big protection gap – that is, the difference between the insured and uninsured parts of the economy – should form part of the national conversation.

Aren’t these matters that the Private Sector Organisation of Jamaica and the Insurance Association of Jamaica should be leading on?

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to aegis@flowja.com.