Report of the working group to study and make recommendations on formation of an India PANDEMIC RISK POOL September 2020

EXECUTIVE SUMMARY

Background

The world has witnessed several disease outbreaks and epidemics in the past years such as Spanish Flu, H1N1, SARS, Ebola etc., among which some have taken the form of a pandemic as well. This has affected both human life and economies across the globe. The COVID-19 pandemic is no exception, albeit this being on a much larger scale and followed by a worldwide lockdown has unsettled an overwhelming proportion of society at an individual and group level.

Impact of Covid-19 in India

 All business houses suffered immense financial setbacks which will take years to recover.

 The Medium, Small and Micro Enterprises, who were unable to handle the financial burden were forced to make tough decisions like furlough staff or close their business altogether. As per CMIE Reports, Unemployment rate saw a steep rise from 8.75% in March to 23.52% in April 2020. The spike in unemployment rate has been unprecedented in the months of April and May. With businesses shuttered causing a huge wave of reverse migration, the country’s overall unemployment rate rose as high as 27.11% for the week that ended May 7, 2020.

 The daily wage earners, who are often migrants, lost their livelihood due to lockdown which led to limited access to basic facilities like food, accommodation and health.

 The economy has faced a huge financial loss and our growth rates have been revised down by various international agencies. Though the Government introduced provisions of extended moratoriums on loans, it hasn’t served enough. Government also announced a major financial stimulus equivalent to 10% of India’s GDP amounting to Rs. 20 lakh Crore. However, this one-time stimulus was ad-hoc and took a huge toll on the Government’s coffers. Possibility of occurrence of such future pandemics can no longer be ruled out. Doling out one-time ex gratia packages is not a viable long-term solution to such occurrences.

 Though business groups have suffered huge losses due to business interruption, they can’t get insurance claims as most of their policies exclude pandemic cover.

 One-time stimulus by the Government equivalent to such a huge proportion of GDP is not economically viable each time a pandemic occurs.

Thus arises the need for a systematically designed well-structured pandemic pool.

Need for a Pandemic Pool

There are estimates that current business interruption premiums in some markets would need to be collected for over 100 years to cover two months of COVID-19-related business interruption costs. The lock-down measures, by which national or local authorities have restricted movement of (parts of the) population, have augmented the risk of business interruption. On the demand side, inability to insure has significant wider economic and social consequences such as businesses and individuals being unable to obtain loans and mortgages. For example, small businesses may find it harder to obtain cover (“availability) or only at an extreme price (”affordability”). Moreover, business interruption insurance for small businesses is not common in the Indian market. Thus in circumstances such as the current COVID-19 crisis there are at least in the future likely to be market failures in respect of the provision of private insurance of both supply and demand necessitating the need of a far larger public-private partnership approach. The pandemic risk exhibits accumulation potential across several lines of insurance business, for example life and health, travel, liability, credit and others. Moreover, the asset side of an insurer’s balance sheet is also affected by the adverse market conditions caused by the economic impact of the response to a pandemic. According to the Insurance industry these factors constrain the supply of insurance. Therefore, it is evident that cover for pandemic risk cannot be provided solely by private commercial insurance and reinsurance systems. If the further availability of this

Coverage for Pandemic Risk

 Insurers/Re-insurers – Insurance and Reinsurance works well and remains affordable when a relatively small number of claims are spread across a broader group, however, in the current pandemic situation, business across all geographies have been hit at the same time.

 Government – Due to massive economic disruption, governments also struggle to provide effective and timely assistance by introducing aid programs on ad hoc basis to the most needed section of the society.

Proposed Solution for India

Pandemic risk being a systemic risk is too large to be taken on by the public and /or private insurance sector or governments alone. To protect individuals and the economy from suffering because of business failure due to such epidemic/pandemic events in future, it was considered appropriate to explore the option of risk sharing by public, private insurers with the Government of India in the form of an Indian Pandemic Risk Pool. Mechanism of sharing this risk would provide a low cost product. Countries across the globe are in the process of forming similar pools. Further, it has been seen that making the product accessible is not sufficient. More often than not covers that are made optionally available are not taken by the intended beneficiaries.

Therefore, a working group with members representing the Indian Insurance/Reinsurance industry was constituted by the Authority to examine the requirement and rationale for setting up a pandemic pool.

The working group took views of various other insurance industry participants including but not limited to Insurers, Re-insurers, Intermediaries and Multilateral organisations. After extensive discussions, the key recommendations of the working group are summarised below.

Core Recommendations

Core Recommendations

The Working Group recommends formation of the proposed Indian Pandemic Risk Pool to address losses and unsettlement caused to the informal and low income sectors of the society and serve as a medium of providing relief to these sectors by the Government in case of any such pandemic or epidemic events in future.

1. Formation, Structure and Administration of the Pool

The quantum of loss due to an epidemic/pandemic risk event is huge and hence is beyond the capacity of public and/or private companies and/or government alone. Hence a risk pooling mechanism with public-private-government participation would be an appropriate resolution to address this similar concern in future. Indian Reinsurer, GIC Re, who has experience of managing the Indian Terrorism Pool and Indian Nuclear pool in India shall be an apt administrator for the proposed pandemic pool.

2. Participation

The participation shall be mandatory for the sectors which have been covered under the pool. This can be with a Standalone Product providing coverage for the event or as an add-on with the existing products.

3. Trigger & Claim payment

Multiple trigger mechanisms shall be set separately for an epidemic and a pandemic event. Claim payment shall be parametric in nature.

4. Size and Financial capacity

An ideal size to start the pandemic pool could be designed to cater approximate 4 crore MSME workers which would lead to a pool capacity of appx INR 75,000 crores wherein a capacity of approximate INR 2000 crores could be expected from the industry participants and a substantial part coming from government in the form of backstop. The pool premium collection is proposed to be invested in government securities or specifically designed bonds by the Indian government. The premiums accumulated over the years and the Investment surplus would help in gradually reducing the government backstop.

5. Government backstop

The Working Group believes that for pandemic pool to have an adequate purpose, it needs to cover at least 4-5 crores MSME workers in first phase and to accomplish that, the assurance from government to provide a backstop is necessary. It is pertinent to note that the backstop triggers only at the event of pandemic striking and the total loss payouts are higher than the capacity garnered by the local insurance/reinsurance and international market. Globally all pandemic pool (including USA, France, Germany) proposals are heavily hinged on their national government’s support in form of similar backstop and are at different stages of approval. The Working Group has proposed a government backstop of appx. INR 75000 crores at the initial stages.

6. Coverage

The pool shall provide coverage in a phased manner. As MSME and the unorganized sector are the worst affected segments of society during the current COVID-19 pandemic in India, frst phase of the pool shall cover Income losses due to non-damage business interruption resulting from a future pandemic event and subsequent lockdown. Pandemic losses are covered under presently available health insurance products, hence the coverage for losses in health segment caused due to a Pandemic event, beyond a threshold, may be covered under the Pool in the second phase. The coverage under the pool may be expanded to life insurance segment also in the later phases.

7. RECOMMENDATIONS & NEXT STEPS

7.1 Recommendations

The current situation has illustrated the potential harm that a pandemic can have on our people, business, society and economy with the current limitation of insurance coverage available to provide protection. Hence Public-private pandemic pool with participation from insurers and government support as a backstop can be a best suitable option to prepare us better from similar future events.

7.1.1 Need of National Pandemic Risk Pool:

COVID-19 is affecting business indiscriminately and sparing none. Subsequently, lockdown has created the need for a cover against an epidemic or pandemic cover for non-property business interruption losses. Most of these losses are absorbed by the policyholders as policy excludes business interruption losses arising out of pandemic. Some enterprises may sustain during the initial period; however, they are undergoing financial setbacks and some businesses which can’t sustain are forced to make tough decisions like reduce the staff strength or close their business altogether. The covers for these losses are not provided by the market as it is beyond the risk appetite of the insurance and reinsurance market. If insurance companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts.

7.1.2 Formation and administration of the Pool:

The best way to address this is a pooling or sharing mechanism with all the stakeholders. Pool will help to provide forward looking coverage for business during the pandemic event which is currently not available in the Indian market. Pandemic risk exists, and it is not going anywhere. So, pooling of all resources is the optimum solution to create something from nothing.

GIC Re is recommended as the pool administrator as they have prior experience in handling similar pools in the Indian Market like Indian Terrorism Risk Insurance Pool (ITRIP) and Indian Nuclear Insurance Pool (INIP). Their experience in managing Indian pools will help to manage the pandemic Pool of the country efficiently at the lowest cost since setting up a new entity for pool administration will involve higher overheads.

7.1.3. Pool Capacity:

An insurance pool can be formed to offer cover for the epidemic and/or pandemic by the various stakeholders with the expectation of capacity in the range of INR 1500-2000 crores from industry through its own and external capacity. The rest of the capacity is in the form of government backstop, which triggers only in the event of a pandemic and if the payouts to policy holders exceed the industry and its arranged capacity.

7.1.4. Pool Structure:

7.1.5. Pool Size and Backstop:

The actual pool size will depend on the risk covered and its estimated potential losses. So far, experts say that business interruption losses caused by COVID-19 pandemic will be huge and unprecedented and it is hardly an estimate which can be the basis of formation of insurance pools and backstops. During the first phase of Pandemic pool implementation, business interruption focusing wages of MSME sector and Migrant workers were given priority. With assumption of 4 Cr employees and workers getting benefited and pay out limited to 3 months maximum then the total pay-out will be INR 78,000 cr.

Since, a pandemic pool of this size is not feasible during its first year of operations. As per recent Indian Nuclear Insurance Pool (INIP) it is recommended to start with a pandemic pool of INR 5000 Cr. The remaining amount of INR 75, 000 Cr will be required as backstop guarantee from the Government of India. During the subsequent phases the pandemic coverage will be extended to other lines of business then the exposure will go up and the government backstop requirement will peak upto INR 125 000 Cr and then it will start gradually reducing. Approximately 20 to 25 years will be required to grow the pool size to make it self-sufficient.

7.1.6. Product Recommendation:

7.1.7. Phase Wise Coverage:

The pool is intended to cover all the affected segments of general insurance, Health & Life, over a period. However, looking at the current capacity and need, the pool will first cater to the most vulnerable segments of MSME to cover salary charges. As the capacity of the pool will build up, the pool will be extended to the SME segment & increased coverage for the MSME segment. The pool would like to cover Health insurance in the next phase and in the later phases, it would also like to incorporate life insurance risks.