India moots parametric Pandemic Risk Pool, with bonds part of capacity

A working group of the Indian insurance and reinsurance regulator IRDAI has proposed the creation of a parametric Indian Pandemic Risk Pool, which could use pandemic bonds as part of its capacity.

The regulator and Indian government tasked an industry working group with exploring the possibility of creating a pandemic risk pool focused on the needs of Indian businesses.

The resulting proposal calls for a public private partnership, between government and the insurance or reinsurance industry, as well as the use of other financial tools to bring additional capacity in from private markets, among which is the concept of pandemic catastrophe bonds.

The pandemic risk pool would be parametric in nature, with a multiple trigger mechanism designed to respond to both epidemics and pandemics, with the claim payments based on parametric triggers being breached.

A risk pool of around US $10 billion is mooted as necessary, in order to cover sufficient workers and businesses to make the plan effective. Reinsurer GIC Re is proposed to administer the facility.

The Indian insurance and reinsurance industry would only cover a small portion of this though, with the government providing backstop funding that would make up the lions share. But the plan notes that global retrocessional reinsurance markets and the use of pandemic bonds with parametric triggers could augment the capacity significantly.

The proposal is that the Indian Pandemic Risk Pool would in its first phases cover immediate income losses caused by non-damage business interruption resulting from a future pandemic event and subsequent lockdown.

Health related losses may be added to the pool in a second phase, it is noted, but the priority is covering the business interruption related aspects that can have such a devastating effect on segments such as India’s unorganised working sector.

A further phase of the pandemic risk pool would also contemplate the addition of life insurance related benefits.

The reason business interruption is the first consideration, according to the working group is, “While it is difficult to assess the frequency of pandemics, the potential severity of losses is immense. The magnitude of business interruption losses that are likely to be incurred is much higher than the losses incurred as a result of any recent single catastrophe event.”

The need to diversify the risk outside of India is also noted, but so too is the inability of global reinsurance markets to do that alone. Hence pandemic bonds, or other capital market structures linked to the same triggers as the risk pool are mooted.

The working group notes the importance of any pandemic bond structure being responsive to the payout needs of the pool, saying that, “designing such bonds in terms of trigger, threshold is extremely crucial.”

The working group’s paper advises that the World Bank and Asian Development Bank may be able to assist in structuring risk financing instruments, such as pandemic bonds, to help in engaging outside sources of capacity for the pandemic risk pool.

Pandemic bonds feature in many of the pandemic backstop and risk pool plans of other countries as well, as the world recognises the need to diversify pandemic risk into the global capital markets to reduce the reliance on government support over-time.

Finding the right structure and of course the right price will be key. As too will finding the right investors, as many having now been impacted themselves by the pandemic effects on global capital markets may find investing in pandemic risk bearing instruments a more challenging concept to buy into.

Also read:

– Capital markets could fund $2bn of pandemic bonds: Hannover Re CEO Henchoz.

– EIOPA calls for ILS role in pandemic risk, but warns on correlations.