Covid-19 and Solvency II: Where is the pandemic risk?
by Lieve Lowet
This is the second part in a series of three articles written by me, which focuses on the Covid-19 pandemic risk. Today, examining the Solvency II framework, pandemic risk is a submodule considered in the health catastrophe risk module, consisting of a mass accident risk submodule, an accident concentration risk submodule, the latter including worker’s compensation insurance, and a pandemic risk submodule (Art 160-163, DEA). According to Article 163 of the Solvency II delegated regulation, the pandemic risk submodule covers the medical expense pandemic exposure and the income protection pandemic exposure but not workers compensation insurance. Annex XVI includes the different factors to be used in that module, such as the ratio of insured persons with clinical symptoms, which are hospitalised (1%), consult a medical practitioner (20%) or seek no formal medical care (79%).
Pandemic risk is also included as life catastrophic risk, for death rates beyond the normal mortality rate. In addition to the health and life catastrophe risk (sub)modules, catastrophe risks are considered in the non-life underwriting risk module, including premium and reserve risk. In the non-life catastrophe risk submodule, there are a further four sub-submodules: natural catastrophe risk, man-made catastrophe risk, non-proportional reinsurance for property risk, and “other non-life catastrophe risk” (Article 135, DEA). The risk factors for those other non-life LOBs for which there is this specific “other non-life catastrophe risk” capital charge are detailed in annex XII, splitting certain groups of insurance obligations up according to three risk factors.
Annex XII considers transport insurance and transport proportional reinsurance (group 1), transport non-proportional reinsurance (group 2), miscellaneous financial loss insurance and proportional reinsurance with exceptions for extended warranty insurance and reinsurance (group 3), general liability (re)insurance, non-proportional casualty reinsurance except general liability (group 4) and credit and suretyship non-proportional reinsurance (group 5). With other words, there does not seem to be a systematic inclusion of pandemic risk in each non-life LOB.
There is for example no pandemic underwriting risk coverage in the fire and other damage to property insurance LOB. There is no further fine tuning included regarding pandemic risks in the solvency requirements for non-life insurance risk. Pandemic risk is also presumed to be considered in operational risk which includes the occurrence of external events. Legal risk is part of operational risk, including compliance and legal environment risk, to the extent it is not already reflected in the other risk modules.
Lieve Lowet
