Lloyd’s of London have called for a government-backed reinsurance scheme to help businesses receive pay-outs after huge shocks.

This comes after many businesses, particularly SME’s have found that their small business insurance does not cover them in the event of a global pandemic.

What have Lloyd’s of London proposed?

In light of the coronavirus pandemic, Lloyd’s have outlined three proposals that could be applied to insurance markets across the world. These would provide consumer protection as well as cover insurance companies. The proposals have been developed by two panels of insurance industry experts. These include the chief executives of Lloyds, Allianz, Axa and Hiscox.

ReStart

This proposes that would see insurance firms pooling capacity to provide business interruption cover for SMEs who have been impacted by the Coronavirus. This would be specifically for SME’s and would require no government intervention.

RecoverRe

This would provide long-term cover for non-damage busines interruption. This would come in the form of an immediate cash injection from the government. Only the governments that have the resources will be able to do this. While insurance companies will have to mange the money going to the SMEs, the government in question may have to guarantee premiums.

Black Swan Re

This is the final proposal, and would require governments and insurance companies to better protect companies from “systemic catastrophic events”. Of course, this is designed to cover global pandemics but will also cover businesses in the event of disruption caused by climate change or cyber attacks, or global supply chain disruption.

What is a Black Swan event?

A Black Swan event is an event that is very rare and very important that has a major effect. The event is entirely unpredictable and causes a great shock. However, the theory goes that in hindsight, it could have been predicted.

A black swan event is the 2008 financial crash, for example. The pandemic can also be considered a black swan event.

Because black swan events are completely unpredictable they only way to prepare for them is to have systems in place to deal with them should they happen. This is where the Black Swan Re idea comes in.

What would the Black Swan Re do?

The Black Swan Re would provide reinsurance cover by pooling capital and ensuring that the government would pay out if ever the pool had insufficient funds.

To ensure that businesses avoid this situation again, government support will be required.

John Neal, the chief executive of Lloyd’s, told Sky News that there were not necessarily the products in place today to cope with an event such as a pandemic;

“So we’ve come up with ideas to see how we can help either directly as insurers, or work with government, to try and deal with these huge systemic exposures should they arise again in the future.”

How has the insurance industry been impacted by Coronavirus?

So far, Lloyd’s have had 30,000 COVID-related claims reported. To date, they have paid out on a third of them. They are expecting to pay more than $100 billion in pandemic-related claims this year.

It is no secret that the insurance industry has come under fire for how they have handled the coronavirus crisis. Many SMEs have found that their business interruption didn’t cover pandemics. This meant that they were not to receive any compensation for having to shut their business. They accused insurance companies of “hiding behind the small print”. Hiscox are currently engaged in a court battle regarding this.

The Financial Conduct Authority have taken this case to the High Court to gain some clarity on the situation. It may also outline how insurance companies proceed going forward. While this may mean that some policies will be tweaked or modified slightly, some new approaches need to be considered. Whether governments accept the proposals by Lloyds remains to be seen, but it can be agreed that there will have to be structures in place to stop insurance companies being put in the same position as they are in currently.

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