The European Insurance and Occupational Pensions Authority (EIOPA) are exploring options for developing shared public and private sector based solutions to pandemic risk. The move follows criticism that limitations in the existing Solvency II rulebook (which EIOPA oversees) have been highlighted by the effects the pandemic – in particular its impact on the asset side of insurance company balance sheets. However, the latest missive from EIOPA points to a more far-reaching review of how the industry protects society against the risk of pandemic.

While nobody could have foreseen the precise nature of the financial impacts of the virus, one problem lies in the effect this has had on the assets in which insurers are invested: With hindsight, the existing volatility-and-duration based model adopted by insurers to measure asset risk now seems a little too deterministic and mechanistic, because it fails to address the potential risks involved in investing in some sectors of industry and not others. Throughout the pandemic so far, whilst public debt has been resilient (but cheap), the fortunes of investing in corporate credit have been more dependent upon the sectors in which insurers have chosen to invest. There’s also a view that the wholesale adoption of investments in illiquid credit and real assets by insurers over the past ten years or so, may prove uneconomic when light is cast upon hidden, embedded risks in areas like corporate real estate or aircraft leasing investments.

EIOPA are exploring a range of options in which insurers – partnered with public funds and supported by public infrastructure – might be able to adapt to build solutions to pandemic in the future.