In July 2020 the Insurance Council of Australia (ICA) released Finity’s report on insurance-related solutions that the Australian Government may undertake for funding future pandemics. The ICA report can be found here.
The insurance sector is an important part of the Australian economy, providing critical protection against the financial consequences of catastrophic events. There are significant challenges to insurability posed by COVID-19 and pandemics more generally, including:
- The magnitude of the losses is significant, well in excess of insurance sector capital
- Global aggregation of loss means risk cannot be diversified (a key tenet of insurance mathematics)
- The premiums would be high, and most likely unaffordable
- The losses are hard to define
- Losses (at least currently) are not calculable prior to a pandemic occurring.
These issues make a traditional private sector insurance risk transfer solution to address pandemic risk effectively impossible at this time. With research and mitigation, such as global investment in contact tracing and vaccines, insurability will become more achievable with time. However, as we transition to a future state there are merits to government backed insurance solution to pandemic risk. In the report Finity outlines four frameworks that can be adopted for future pandemic risks, balancing the pros and cons of each.
Finity is proud to have assisted the ICA on designing solutions that maintain a strong insurance sector while protecting Australia for the future.
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