Systemic risks and the insurance sector

Systemic risks – risks, such as COVID-19, that are so large in scale they can cause the breakdown of an entire system – not only pose a major threat to society but also render traditional risk transfer mechanisms unsuitable, calling into question the role of the insurance sector in addressing them. This FCII dissertation considers the nature of such risks and analyses what role the insurance sector can play in providing solutions for risks whose intrinsic nature makes them impossible to cater for within the traditional risk transfer paradigm.

The topic has been chosen because of the societal vulnerability to systemic risks and the apparent inability of conventional insurance products to cater for them. Given their emerging nature and the topicality of COVID-19, this paper predominantly explores the question of systemic risk through a consideration of pandemic risk. Additionally, because this paper has been written at a time when the full extent of the impact of COVID-19 is still unknown, its research is limited to a finite amount of online data, papers and articles on the evolving subject matter.

As part of its analysis, this paper considers how the insurance sector can mitigate the impact of systemic risks, both inside and outside the framework of risk transfer. In reviewing the options for risk transfer, this paper will consider several combinations and structures, including the use of pools, capital markets and government funding, and contends that the most important and effective part the sector can play is by combining skillsets and capital in collaboration with governments through public-private partnerships.

In analysing the role of the insurance sector, this paper refers to the non-life (P&C) insurance sector and considers society to represent individuals and businesses. Traditional risk transfer mechanisms are considered to be insurance contracts where the underlying capital is provided by insurers and reinsurers.

The paper is comprised of four key segments:

• what systemic risks are and why they are important

• risk assessment

• risk prevention

• risk transfer

Read the report HERE