Vaccinating insurers against pandemics – a review of capital requirements for pandemic risk

FSI Briefs No 15 Vaccinating insurers against pandemics – a review of capital requirements for pandemic risk Jeffery Yong September 2021 FSI Briefs are written by staff members of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS), sometimes in cooperation with other experts. They are short notes on regulatory and supervisory subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS or the Basel-based standard setting bodies. Authorised by the Chair of the FSI, Fernando Restoy. This publication is available on the BIS website (www.bis.org). To contact the BIS Media and Public Relations team, please email press@bis.org. You can sign up for email alerts at www.bis.org/emailalerts.htm. © Bank for International Settlements 2021. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 2708-1117 (online) ISBN 978-92-9259-504-3 (online) Vaccinating insurers against pandemics – a review of capital requirements for pandemic risk 1 Vaccinating insurers against pandemics – a review of capital requirements for pandemic risk1 Highlights • The Covid-19 pandemic crisis provides an opportunity to review existing regulatory requirements and to sharpen them so that they remain appropriate for future pandemics. This is despite insurers, in general, not facing significant solvency issues from increased Covid-19-related deaths. • Currently, most regulatory frameworks do not prescribe specific capital requirements for pandemic risks. Selected regulatory capital frameworks cover pandemics mainly in terms of mortality risk. Cross-jurisdictional comparison on relative levels of these requirements is complex given other determinants of the final capital requirement calculation. • The Covid-19 pandemic crisis shows that risk exposures of insurers extend beyond mortality. Regulatory frameworks, though not necessarily through capital requirements, may consider incentivising insurers to address other risks that could arise from future pandemics, including heightened market, credit and operational risks, as well as their increased interdependencies. 1. Introduction The Covid-19 pandemic is an unprecedented event that has taken lives, destroyed businesses and changed the way we live and work. Notwithstanding disputes between insureds and insurers on certain coverage, particularly business interruption insurance, the devastating financial impact from the crisis has partly been cushioned through insurance. Such insurance includes paying out death claims to support families of those who perished due to Covid-19, covering medical and hospitalisation costs, and supporting lost business incomes due to public health safety measures. The experience underscores the importance of sound insurance supervisory frameworks in ascertaining that insurers can provide critical financial support in times of disaster and fulfil their obligations to policyholders even under such extreme circumstances. From an insurance perspective, one of the most relevant impacts of a pandemic is the increased number of deaths. Compared with the Spanish flu over a century ago, which killed an estimated 50 million people worldwide,2 the World Health Organization (WHO) has attributed over 4.57 million deaths (so far3) to Covid-19. There are views that the actual number of Covid-19 deaths is higher due to underreporting by countries, lack of testing and definition disputes (eg whether deaths caused by postponement of medical procedures due to hospital capacity constraints should be included). Nevertheless, the observed increased number of so-called “excess deaths” illustrates the human toll of the pandemic. Excess deaths are those over and above the expected number under normal circumstances. This measure provides a rough estimate of the total number of Covid-19-related deaths. 1 Jeffery Yong (Jeffery.Yong@bis.org), Bank for International Settlements. I am grateful to Lazhare Bouldi, Gilbert Chin, Denise Garcia Ocampo, Peter Kohlhagen, Daniel Mayost, Danita Pattemore, Beatriz Romo, Jooste Steynberg, Falk Tschirschnitz, Stuart Wason and Daniel Weijand for helpful comments, as well as Marie-Christine Drexler, Kaspar Köchli and Christina Paavola for their support. 2 See History (2020). 3 As at 6 September 2021. See World Health Organization in References. 2 Vaccinating insurers against pandemics – a review of capital requirements for pandemic risk The WHO estimated at least 3 million excess deaths in 20204 and yet, their financial impact on life insurers has been muted. This can be attributed to a large protection gap of uninsured lives5 especially