Canada’s federal government is in discussions with Lloyd’s of London over the establishment of a public-private reinsurance partnership, which would allow the government to protect the economy from future “black swan” events like the COVID-19 pandemic.
Under the partnership, the Canadian government would provide a guarantee or backstop for losses caused by a catastrophic black swan event, and would be “two layers away” from initial capital outlays – which would be primarily handled by pooled insurance industry funds and private capital.
Lloyd’s CEO John Neal told Financial Post that the company considers Canada one of its top three global markets, with about $4 billion in business. Neal said that Lloyd’s is in talks with the Department of Finance Canada regarding the partnership, which aims to avoid having the federal and provincial governments commit billions of dollars in emergency aid to support their economies on the fly – which is exactly what happened when the coronavirus pandemic hit.
The chief executive added that in addition to Canada, other governments have expressed interest in discovering a shared way to deal with systemic issues caused by events like pandemics, cyberattacks, or even a large-scale power grid or supply chain interruption.
“The Canadian government is one of them,” Neal said, adding that Britain, the European Union, and Singapore have also looked into forming a partnership.
According to Neal, the government effectively becomes the “insurer of last resort” through the deal. The executive further explained that governments around the world have committed about $16 trillion in emergency pandemic aid. The partnership model proposed by Lloyd’s offers those governments “a more controlled method of managing events” – particularly when the claims outpace the available funds to pay for them, said Neal.
“The longer there isn’t a loss, the bigger the float is underneath [the government backstop],” he told Financial Post.
