26 Mar 2020
Retrospective insurance could save UK businesses, but only if employers continue to pay staff during the coronavirus pandemic
Wetherspoons’ decision not to pay its 43,000 staff during the coronavirus crisis reveals a major gap in the government’s pandemic response, according to an expert in financial economics.
Professor Alistair Milne, of Loughborough University’s School of Business and Economics, has published a new paper (March 21) which examines ways of minimising the economic impact of the pandemic – estimated to be equivalent to a 10% fall in global GDP.
In it, he details retrospective insurance – a process that would protect all employers and workers against any financial loss caused by COVID-19.
However, a requirement for qualifying for the backdated policy would be that businesses continue to pay staff during the crisis – however long that might be.
As it stands, Wetherspoons would not be eligible.
Prof Milne said: “The overriding priority in responding to the Covid-19 pandemic is, as it should be, on saving lives.
“We cannot though ignore the accompanying economic shock.
“First off, we wouldn’t have had to worry about the economic impact of the pandemic at all if firms had taken out business interruption insurance that covered this kind of risk.
“However, in practice very few do.
“As a result, coronavirus threatens widespread business failure and systemic structural damage to our economic system.
“But we can prevent this damage through Government providing the missing insurance protection – ‘retrospective insurance’.”
The approach complements measures already taken – for example, the payment of 80% of wages, announced by UK chancellor Rishi Sunak.
It is also relatively cheap compared to the huge losses expected.
“For 4% of GDP, we can inoculate against an economic contraction of 10% of GDP,” said Prof Milne.
THE BASIC PRINCIPLES
Provide it for everyone
Such a scheme of retrospective insurance can provide support for all businesses large and small, for non-profit cultural, social and religious organisations and for the self-employed.
Employees are protected because their employers are protected.
It is “retrospective insurance” because unlike conventional insurance there is no premium paid to cover anticipated risk over the year ahead.
It stops job losses and withholding of wages
Selfish firms who do not continue paying workers, as Wetherspoons are threatening to do, are left outside the net, do not get the retrospective insurance and so go bankrupt.
It is tailored to need and is affordable and fair
In a new paper, Professor Milne has shown that retrospective insurance is surprisingly inexpensive – 4% of GDP can inoculate against an economic contraction of 10% of GDP.
It is formula-based, with pay-out based on assessing lost ‘value-added’.
This ensures firms are helped as needed but do not through a ‘bailout’ get more than their fair share.
It provides immediate support for all essential expenditures
An analogy is with the medical costs at a hospital. Because the patient is insured, either privately or through state provision like that of the NHS, bills do not have to be paid upfront.
Retrospective insurance is the same.
With insurance in place, all essential expenditures can, if necessary, be financed on credit and the bills settled later once the crisis has passed.
The credit will take many forms, such as bank and non-bank loans to large and small businesses – with explicit government guarantee – to cover wages and overheads.
An option to pause payments of loan interest and principal – with repayment underwritten by the government insurance.
Extension of trade and customer credit from utilities and other essential suppliers.
A full version of Alistair Milne’s proposal for retrospective insurance is set out here.
Alistair is professor of financial economics at Loughborough SBE.
He is the author of “The Fall of the House of Credit” a comprehensive account of the global financial crisis of 2008 and principal investigator of two research projects on insurance at Loughborough University https://floodfinjava.lboro.ac.uk/ and https://www.techngi.uk/