Worldwide: IREG Update - Global Pandemic Emergencies: The Insurance Industry Tackles A Seemingly Unmanageable Risk

Global pandemic emergencies: the insurance industry tackles a seemingly unmanageable risk

On May 21, 2016, the World Bank Group announced the Pandemic Emergency Financing Facility (PEF), a new global financing mechanism that is the first-ever insurance market to protect against the global risk of deadly pandemics. The PEF was developed by the World Bank Group along with the World Health Organization and other public and private sector partners, to ensure necessary emergency funding is available when needed in order to help prevent limited disease outbreaks from becoming larger and more costly pandemics.

Per the World Bank's announcement, the PEF will improve disease outbreak response by:

  • Insuring the world's poorest countries against the threat of pandemics
  • Ensuring that funds are released quickly so that emergency response time is accelerated
  • Mobilizing a faster and better coordinated response that ultimately reduces the overall cost of the response
  • Promoting global and national investments in pandemic preparedness and stronger health systems

Why the need for a new model?

The World Bank Group in rolling out the PEF has reiterated their strong belief that global pandemic preparedness is a critical priority to achieving their overall goals of ending poverty and sharing prosperity. Dr. Jim Kim, President of the World Bank Group, has stated that achieving these goals requires thinking and acting differently, because he believes that economic growth alone will not get us there.

The discussion to create an innovative financing model to fund global pandemic response reached a peak on the heels of the Ebola epidemic during the 2015 G7 summit. The G7 leaders began an in-depth conversation with the World Bank Group around the need for a new financing mechanism for emergency response efforts in order to break the recent trend of moving from crisis to crisis on an ad hoc basis. During a global health emergency, response efforts rely heavily on financing mechanisms that have the capability to release funds quickly. For recent emergency responses, especially during the Ebola epidemic, that has resulted in a few entities and donor governments repeatedly shouldering a majority of the funding responsibilities for global responses. The insurance industry joined the conversation, motivated by the fact that they hold the life insurance policies and the business disruption policies most acutely impacted during severe outbreaks and catastrophic pandemics. In fact, the US insurance industry is the largest holder of business disruption insurance.

Recent crises also have shown that when funds are dispersed, they are not usually dispersed until outbreaks have dramatically escalated into epidemics. This creates a funding gap at the early and critical stages of an outbreak, where interventions could prevent them from ever growing into costly pandemics. The goal of the global conversation that began a year ago was to design a first-of-its-kind financing infrastructure that both spreads the risk, so as to grow the base of funding to more governments and entities from around the world, while also building a mechanism that would ensure a quick and early release of funds.

Are pandemics a manageable risk?

With the Ebola epidemic still in our recent memory and the threat of Zika becoming more urgent as the summer months hit the United States, the question remains whether the threats of these types of global health emergencies are predictable and therefore a manageable risk. Ebola has been a known disease since 1976, with outbreaks in South Sudan and the Democratic Republic of the Congo. But until the 2014 epidemic, there had never even been an outbreak in West Africa. Similarly, the Zika virus was first identified in 1947 in a monkey in Uganda, and up until the 2007 outbreak there were only 14 human Zika cases documented. The 2007 Zika outbreak in the Yap Islands in the Pacific Ocean was the first time it was found outside of the African and Asian continents. The current Zika epidemic is believed to have been brought to Brazil by an infected traveler from French Polynesia.

These recent outbreaks illustrate the crux of the fundamental question of whether pandemics can be predicted and, more importantly, are they a risk that can be managed? The World Bank's PEF model is based on the premise that if you take the threat of the next pandemic as a whole, rather than predicting any one specific and individual outbreak, the absolute certainty increases and therefore makes it an attractive risk to manage through an insurance mechanism. The World Bank estimates that there will be a severe pandemic outbreak in the next 10 to 15 years, severe enough to destabilize societies and economies. While the next pandemic outbreak may be inevitable—and there might be certainty around the prediction that there will be a severe pandemic somewhere in the world in the next decade—the current ability to accurately predict where it will be, what it will be and its severity remains lacking in many countries.

The PEF model addresses this reality by globalizing the risk through incentives to the broader world community to buy into the model, so as to broaden the scope of those with an interest in the outcome. It also pairs the first-of-its-kind insurance design with requirements on countries to develop and implement pandemic preparedness plans, thereby reducing the overall risk of outbreaks turning into deadly pandemics.

The World Bank Group estimates that the annual global cost of a moderate to severe pandemic would be $570 billion or 0.7 percent of global income, while a severe pandemic similar to the 1918 Spanish flu could be as much as 5 percent of global income. Looking at the potential global economic devastation a pandemic could cause has brought stakeholders from different industries to the debate on how to best finance global health emergencies

How it works

As our world continues to shrink, our communities have become closer together than ever. The ability of small towns in rural Africa to identify, treat and contain health emergencies determines whether communities in Europe, the United States and the rest of the developed world will be impacted by the disease. Therefore, the PEF focuses on providing funds to low-income countries, which generally are more vulnerable to major outbreaks due to weaker health systems and lack of resources, to implement effective emergency responses.

The PEF will provide coverage to all 77 of the world's poorest countries who are currently eligible for assistance through the International Development Association (IDA) from the World Bank. When an outbreak occurs that meets the PEF's triggering criteria, funds would be released to those countries to implement an effective emergency response, as well as to any international agencies also involved in response efforts. The PEF is designed to cover outbreaks of infectious diseases most likely to lead to major epidemics. The PEF funding available is capped at $500 million over three years, with an additional replenishable cash window of $50 to $100 million.

There are two avenues that fund the PEF: insurance and cash. The insurance avenue aggregates funding from both the reinsurance market and the proceeds from bonds issued from another World Bank entity, the International Bank for Reconstruction and Development (IBRD). The cost of the premia and bond coupons for the insurance avenue will be funded through development partner contributions. Specific trigger criteria related to an outbreak's severity must be met in order for funds to be released under the insurance avenue, including: outbreak size, outbreak growth and outbreak spread.

The cash avenue offers a more flexible financing mechanism that would be available to fund responses to an emerging public health threat that might not meet the PEF triggering criteria. This avenue will be guided by similar standards as the insurance avenue, but with additional flexibility. Its goals are to provide: 1) additional funding to outbreaks covered under the insurance avenue but which require increased resources or earlier funding streams to effectively respond; 2) a funding resource for very severe outbreaks that currently only exists in a single country; 3) the flexibility for funding public health threats from new and unknown pathogens that don't meet the insurance avenue criteria; and 4) surge funding to development partners responding to outbreaks.

The PEF is governed by a steering body made up of members of contributing development partners as well as non-voting members from relevant international bodies (World Health Organization, World Bank Group, etc.) that must be agreed to by the voting members. In addition, there is an experts' roster which reviews and advises on applications for funding, as well as an advisory committee, which will meet annually on pandemic preparedness response and facilitate response readiness amongst countries.

Conclusion

This first-of-its-kind financing mechanism to pre-fund a global known risk has the promise of revolutionizing developed countries and developing countries approach to pandemic preparedness. By tying the funding streams also to policy goals surrounding preparedness and improving health system infrastructure participating countries must meet, the PEF has the potential to drive down the overall risk that outbreaks turn into catastrophic epidemics with disastrous global economic impact. Donor governments and entities now have an additional financing mechanism, which should relieve the pressure that they alone need to shoulder the cost of health emergency responses. Dentons will continue to monitor the implementation of the PEF over the coming months.

ICYMI

Noteworthy links from the past two weeks

General

  • The Federal Reserve outlined new approach to capital requirements for systemically important insurance companies [Wall Street Journal, Life Health Pro, Bloomberg]
  • The US Chamber of Commerce led a coalition of industry groups in a lawsuit against the US Department of Labor challenging its new retirement advice fiduciary rule [Reuters, Investment News, Investment News]
  • The National Association for Fixed Annuities filed a separate lawsuit challenging the application of the rule to fixed indexed annuities [The Investment News]
  • California and Washington State continued to push for fossil fuel divestment for insurers [Insurance Journal]

Life

  • The DC Court of Appeals approved an expedited hearing schedule in the MetLife case against the Financial Stability Oversight Council [AM Best]
  • The New York Department of Financial Services forced Chinese insurer Anbang was forced to withdraw its application to acquire Fidelity Guaranty Life [New York Times]

Health

  • Health insurance startups in New York and Maryland cited a "reverse Robin Hood" effect created by the Affordable Care Act Risk Adjustment program [Politico, Biz Journals, Bloomberg BNA]
  • The number of health insurers suing the federal government over unpaid risk corridor payments has grown [Oregon Live, Modern Healthcare]

International

  • The International Association of Insurance Supervisors eyed a path to internationally harmonized cyber security requirements [National Law Review]
  • The US and EU continued talks on a bilateral insurance regulatory agreement that would include reduced US collateral requirements [Insurance Journal, Morning Consult]

Property & Casualty

  • Property & Casualty insurers applauded the approach to capital standards for Systemically Important Financial Institutions announced by the Federal Reserve [Business Insurance]

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