You’ve heard of insurance, but what about reinsurance? The concept of reinsurance has existed for over 700 years, starting in Genoa. Its creation was to protect the assets of traders and merchants. Reinsurance has since evolved to be a global industry that stabilizes local insurance markets, and provides capital to the economy.
In a nutshell, reinsurance in its modern iteration serves as insurance for insurance companies. Local insurance companies purchase reinsurance in the event that they will be so overwhelmed by paying out simultaneous claims that would potentially bankrupt their business. This could happen if there was a natural disaster such as a detrimental earthquake that results in thousands of people claiming insurance at the same time. This is why insurance companies which cater to a local audience rely on reinsurance companies that are global. Reinsurance companies exist precisely because of their globality, and because of the way they are able to mitigate risks by spreading them across the world.
"Reinsurance has since evolved to be a global industry that stabilizes local insurance markets, and provides capital to the economy."
By spreading risk, it inherently minimizes it. Since the likelihood that a catastrophe requiring payouts and resources would strike simultaneously in New Zealand and Italy are quite low, reinsurance has been a successful business since the mid 19th century. But what happens during a global pandemic as we are experiencing now?
Reinsurance traditionally offered extended coverage of key risks at affordable rates. Risks covered include those associated with natural disasters, unexpected high numbers of expensive claims, and industry liabilities. Until the world faced COVID-19, the risk of disease was typically not included in these reinsurance and insurance policies, and the few reinsurance products that were on the market for epidemics were not being purchased.
A few companies including Munich Re came together to offer epidemic insurance products back in 2017 for large corporations and businesses, and yet, it was hard to sell an expensive product that tackles a global crisis that felt seemingly nowhere near imminent. With the last global pandemic happening a hundred years ago, the low risk was simply not worth the investment for most companies. But when COVID-19 first had an outbreak in Asia, corporations hurriedly wanted to purchase this insurance worldwide. As of September 2020, Munich Re is no longer offering reinsurance for pandemic business losses.
The need for pandemic insurance to be incorporated into reinsurance policies has proven to be crucial. With pandemics not following an average curve path, but rather, having the potential to develop any time, the fear of another pandemic hitting our society and economies is not only valid- it is impending. But the risk of another disease centered global danger is not the only one we should be considering.
Deforestation and climate change (which is argued to be the reason COVID-19 and other zoonotic viruses can spread so quickly) continues to impact our world and our daily lives and livelihoods. What will happen to insurance and reinsurance in a not-so-distant future if we continue to experience environmental disasters such as the recent California and Oregon fires which are fueled by climate change? What happens if fires, hurricanes, or hailstorms become so commonplace and simultaneous that we find ourselves claiming insurance on a quarterly basis all across the world?
If there’s one unmistakable takeaway to be learned as a result of the current pandemic it's that nothing is certain. Risks must be foreseen and taken seriously before they are at our doorsteps, hospital beds, and economies. If we knew then what we know now, corporations and consumers would have paid the extra premium for epidemic reinsurance. The answer lies in anticipating and preparing for the worst, and actively working towards a better, healthier, and sustainable future.