As world leaders decide how to reopen economies and find a path back to a “new normal” for its citizens, we should question what we can learn and how to prevent events like COVID-19 from having the catastrophic negative impacts on our economy the next time around.
As many businesses were blindsided by the effects of a shelter in place policy, or in some locations a complete lockdown, there were options available that may have saved many companies from relying on reactive government bailouts and grants.
One of these solutions is known as parametric insurance. This is not a new type of insurance and is defined as a novel form of risk transfer in which a pre-established payment to the insured party is made upon the occurrence of a specific catastrophic event, according to a Carrier Management report that covered the rise in the popularity of parametric insurance, back in 2019. Most people associate this type of insurance with weather-related catastrophes such as tornados and earthquakes, but it can also be much-needed protection against unforeseen losses caused by a virus-based pandemic.
A policy designed to provide business interruption insurance in the event of a pandemic was actually created by Munich Re, Metabiota, and Marsh in 2018 named PathogenRX. The need for this type of insurance stemmed from outbreaks such as Zika, MERS, and SARS. According to Marsh, “companies have had limited options for protecting their bottom lines from the financial impact of pandemic and epidemic risks. That’s because unlike natural catastrophes and other crises, pandemics and epidemics typically do not cause immediate physical damage — and they’re difficult to model because businesses have had no way to measure their potential economic loss.”
A policy like PathogenRX is being targeted towards industries such as Hospitality & Gaming, Travel & Tourism, Aviation, Public Entity, Education, Real Estate, Sports & Events, and Retail/Wholesale Food & Beverage.
We have all witnessed firsthand the economic impacts of the COVID-19 worldwide health crisis and how it had a far greater impact in scope than its predecessors. In early March 2020, the Organization for Economic Co-operation and Development (OECD) predicted that the COVID-19 outbreak could cut global GDP growth by 0.5%, costing businesses trillions in economic losses. More recently, the International Monetary Fund (IMF) predicted worldwide trade will plummet 11% this year, and then grow 8.4% in 2021. hat it expects the global economy to shrink 3% this year, which much worse than its 0.1% dip in the Great Recession year of 2009 and did not rebound until 2021 with 5.8% growth.
In hindsight, a parametric insurance policy could have protected many companies against financial loss stemming from such a pandemic, so we will see how this segment of industry will continue to innovate and grow.