The insurer of last resort?
Ralph Kirkwood considers that the coronavirus epidemic is one in a series of inevitable crises, and argues that we have seen government behave in part as the “insurer of last resort”, but we have never properly defined that role, and we must.
It is said that the first role of government is to protect the people. While this statement is not usually made with a global pandemic in mind, in the coronavirus crisis almost all governments around the world have tried to do this with varying degrees of success.
The role of government has changed over time in response to the crises of the day: from Keynes’ idea of government acting as the purchaser of last resort, to the financial crash resulting in the government acting as the lender of last resort and now in the wake of this crisis the government acting as insurer of last resort. In defining the new responsibilities of government we need to ensure that we learn the lessons of the past and define those responsibilities from the centre left. We must win the argument, as Keynes did in his time but as the centre left failed to do a decade ago across the globe. If the government really is the insurer of last resort, then after this crisis is over it better start acting like it.
Insurance companies do two key things. First, they offer an insurance policy for which you pay a premium. This ‘insurance policy’ payout from the government in scenarios like the coronavirus pandemic needs greater definition in slower time. It would be churlish not to recognise the tremendous effort from both the UK and Scottish governments and the civil service in standing up the support programmes in such a short space of time. While overall it has had the effect of propping up the economy, there are undoubtedly some areas that could be improved. Now is not the time to get into these in too much detail, but we do need to look at the impact of these schemes once we have managed to get back on our feet. We can then ensure that we design policies that will more effectively support businesses and the wider economy for the next time that this happens.
It is important to recognise the good work that the private sector has done in rising to this challenge too, from alcohol producers moving to the production of hand sanitiser to large fashion producers starting production of PPE. But we must also acknowledge that this could be better coordinated, and it should be done through a developed industrial strategy and government taking on the second key activity of an insurance company.
The second thing that insurance companies do is invest the money that is collected from premiums in the time that they don’t need to pay out. If we assume that this global pandemic is a once in a century event, then that is a lot of investment that we could be making. Couple this with the “wall of money” that is building in private sector investment and there are significant opportunities that can come if we can steer that investment into the right areas. The first area of investment should be where we have failed in this crisis – PPE and testing.
We remain in a position in the UK where PPE and testing are inadequate to deal with this crisis. To be better prepared for future we need to ensure that we can get our hands on both more quickly. Here the best solution is not to have a stockpile of materials that will go out of date, leaving their utility in a crisis in question, but instead to enable Domestic Distributed Capability of Production (DDCP) for these key items.
DDCP means that we should be able to stand up local production in short order. This is something that we have already seen in the production of ventilators and in PPE in Scotland, demonstrating that bodies such as Scottish Enterprise working with the private sector can deliver incredible results in accelerated timelines. In normal times being able to start up production of quality PPE from scratch in six weeks is almost unthinkably fast, but during a pandemic it is just too slow. We similarly cannot be reliant on deliveries of materials from overseas to much fanfare that fail on basic quality.
We can do this through institutions such as the new Scottish National Investment Bank making investments directly to SMEs to build the capability for these new production lines, and Scottish Enterprise ensuring that this capability is maintained. This direct investment in our SMEs will ensure that for the next crisis, instead of SMEs putting their employees on furlough we can have them still gainfully employed producing the items that our public services require. We will have this capability in place for when we need it, but we can still use normal supply routes in normal times.
This would be more straightforward for PPE production than it would for testing capabilities, but in testing too we can be more prepared for the next crisis. We have excellent biomedical testing facilities in this country that could see us get tests created and result centres established. Again the requirement is an ability to start these processes quickly, and our experience with coronavirus can help make this better for next time.
The key thing is to shape this in a way that is aligned to our values and that matches up with a proper industrial strategy. Scottish Labour produced an excellent industrial strategy ahead of the 2017 election that requires to be revisited in the light of coronavirus. DDCP must be a plank of the strategy that is offered as part of our manifesto in the Holyrood elections next year.
I agree with Matt, we should shape this new post coronavirus world and need to start that process now. To do this we must win the argument over the role of government in the 2020s. We must learn the lessons of Keynes, who won his argument about the role of government in supporting demand, as well as the lessons of the financial crisis, where the centre left worldwide lost the argument on austerity.
The next decade will be one of economic repair and preparation for the next crisis. This type of activity is, in part, carried out by insurers. It’s time that we decided what type of insurer our government needs to be – one that looks for any excuse to not pay out, or one that seeks to support those who have been faithfully paying their premiums best prepare for and recover from these situations.