Rethinking the state’s role as risk taker

Rethinking the state’s role as risk taker

Covid-19 is spurring a lot of thought and reflection on how we handle major risks. A few of my own colleagues have written recently about the relevant principles for allocating risk and costs.

Back in October I made an early contribution to this debate with an article on the state’s role as risk taker.

I argued that governments have intervened to address (and often taken on) risks ranging from poor health to unemployment to terrorism to animal diseases. These are risks that the market is often ill-equipped to deal with alone. Market failures, uncertainty, highly correlated risks and concerns around equity have driven governments to intervene in many different ways. Governments and society have made explicit choices about how these risks are addressed.

I ended by arguing that government involvement in risk was likely to rise in the face of growing society-wide perils. Today we see that playing out in real time as governments around the world have responded to Covid-19. We find that when faced with new catastrophic risk our markets and institutions cannot deal with them alone. Insurance was often either not provided or not purchased and the scale of losses clearly beyond what any industry could handle alone. That has left  individuals and businesses facing huge losses. In response, governments have had to rapidly design and implement support measures of unprecedented scale, shouldering much of the risk and fallout from Covid-19.

These measures are undoubtedly necessary, but may not have been how policy makers would have chosen to respond if they had more time to think and plan. We might also hope to avoid future situations like the FCA going to court to clarify the scope of business interruption cover in the current crisis.

We in the UK already have schemes in place to address risks ranging from terrorism to animal diseases. Where these risks materialise, these schemes provide clarity on who shoulders the cost, how much support is available and how support is accessed. This is hugely valuable infrastructure to have in place in times of crisis.

There is a way to go yet, but this crisis will eventually pass. Unfortunately, future challenges await. That could be in the form of cyber-attacks, climate breakdown, another pandemic or something else entirely. We can’t plan for every contingency, nor can we necessarily design pre-emptive schemes of the scale we see today.

What we can do is think more critically about the risks we face as a society, how we want to distribute those costs and how we can construct better interventions to more quickly and effectively support the economy.

A good place to start is reflecting on the mechanisms that already exist to tackle major risks. We have in place mechanisms that promote public-private partnerships to deal with catastrophic risks. Schemes like Pool Re for example provide clarity about how risks are divided between the public and private sector in the event of a terrorist attack, and, crucially, ensure that businesses are covered for losses and can rapidly access support through their insurers. Such a scheme shows that we can pre-emptively design support for major crises and avoid making all policy on the hoof. We should be exploring how we can extend existing mechanisms and schemes to put us on a better footing when the next crisis emerges.



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