Covid 19 coronavirus: Could pandemic insurance become part of the future?

Insurers could provide pandemic cover in the future to help individuals and businesses get back on their feet faster should another major event affect New Zealand, the head of New Zealand's general insurance body says.

Tim Grafton, chief executive of the Insurance Council of New Zealand, the industry body for insurers who provide home, car and contents insurance, said insurers would be looking to deploy their expertise to develop new products.

"As we prepare for the future, insurers will have the opportunity to deploy their risk expertise and learnings from Covid-19's impacts to develop products for their customers and work with governments to reduce the impact of the next global pandemic."

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Business interruption insurance does not currently cover pandemics which is why businesses have not been able to claim for the Covid-19 shutdown unless they had a specific pandemic clause in place.

Grafton said most policies had exclusions for pandemics and infectious diseases or if infectious diseases were included it would only have been named diseases, not previously unknown ones like Covid-19.

But now the world had recognised what a pandemic does there would be an appetite for insurance to play a role, he believed.

"It is only too clear how expensive a pandemic can be."

Grafton said the Government was in a fortunate position of being able to put a lot money into supporting businesses.

But unless there was now a benign economic period for some time all countries would enter the next crisis with less fiscal firepower than they had for Covid-19, he said.

"This has led some to promote the need for public-private insurance arrangements to be developed to better meet the systemic, economic fall-out of a pandemic."

Grafton said in some countries there was a terrorism pool for insurers to tap into while others had schemes that provide pooling arrangements for hurricanes and tropical cyclones where a certain metric was used to trigger a payout such as wind speed.

"The world can't go through this without thinking how do we better respond in future, given most economies will be weaker after this."

BALANCE SHEET HIT

Insurers have continued to operate during lockdown as essential service providers and Grafton said it was too soon to tell the full financial impact on the general insurance sector from Covid-19.

"On the bad news side, insurers will be hit just like anybody else from the downturn in the global economy and domestic economy.

"It's going to be significantly downhill the likes of which we haven't seen for a generation or so."

Grafton said insurers got their income in two ways; through premiums and investment returns.

"Both of those have taken hits. Asset prices have taken a hit and will continue to take a hit and interest rates have gone south significantly."

Grafton said premium incomes would be down for a whole raft of reasons and that would play out over the next few months.

"It's a combination of business collapses, higher unemployment, and people adjusting insurance."

He said insurers were required to carry higher levels of solvency than other companies to ensure they were able to pay out when large commitments came through and were also required to stress test for extreme conditions.

"We are now under extreme conditions."

Even the most optimistic scenarios painted by Treasury have unemployment at 10 per cent with the worst case at 26 per cent.

"We have to stress test and use the most benign forecasts as a baseline and look at testing at the extreme end of the spectrum.

"All of that is a very fine balancing act for insurers to navigate through this."

Insurers have put together a range of options to help their customers through financial hardship with many having a reduced income or loss of income.

Grafton said customers looking to cut costs should consider adjusting excesses, paying monthly rather than on an annual basis or changing the terms of a policy such as notifying the insurer that you are not driving car at the moment.

"The balancing act is navigating through the next few months, providing support, while meeting expectations of regulators."

Some good news for the industry was that large infrastructure projects are expected in construction to help boost the economy.

"All of those projects are going to need to be underwritten by insurers."

Grafton said insurers did have the capability to provide that but it was more complicated by the pandemic.

"We've got to understand what the delays will be under a social distancing environment and less efficient construction."

Project managers would be sitting down and working that out now, he said.

"It's going to be more complicated, it's not that it can't be done, but has to be done."

• Covid19.govt.nz: The Government's official Covid-19 advisory website