The German insurance industry proposes a private-public sector hedging facility to provide protection against future pandemic losses. This model includes the capital market as well as insurers and would also have access to state aid as a last resort, according to a green paper issued by the German Insurance Association (GDV).
The initiative was launched against the backdrop of the major economic turmoil resulting from the outbreak of the novel Sars-CoV-2 virus. „We want to launch a discussion about a system to mitigate the economic fallout from future infection waves that could replace ad-hoc government support to an extent,“ says Jörg Asmussen, Chairman of the GDV Management Board. „The coronavirus has shown that many companies run the risk of insolvency if they don't receive rapid financial support in a pandemic.“ However, financial losses of this magnitude, extending across multiple industries, cannot be covered by the private insurance sector alone.
The GDV proposal centres on a legally independent entity with a capital stock running into the billions. The contributions are supplemented by claims payments from direct insurers and reinsurers plus capital market instruments, such as catastrophe bonds, that would be redeemable in the event of a pandemic. That would at least cover any losses occurring in an early phase. „The additional government funds would only be used once the capital stock has been exhausted“, stresses Asmussen. If, for example, an epidemic were contained locally, the losses incurred within the affected regions could possibly be covered without government support.