Why Pandemics Are Not, In Fact, Insurable
Robert Gordon, APCIA's senior vice president of policy, research and international, on why hardships created by events like COVID-19 must be addressed through government intervention.
The COVID-19 pandemic has caused unprecedented and devastating hardship on individuals, families, businesses, and communities across the globe. Pandemic losses have been far more extensive than any past catastrophic event, causing $23.5 trillion dollars in long-term losses, according to The Wall Street Journal. This is compared to the largest past global insured loss event in history, Hurricane Katrina, which caused $875 billion, nearly $87 billion insured property losses.
While insurance policy discussions have been largely focused on business continuity, the critical economic losses are far broader. A recent opinion editorial suggested that insurers should play a role in taking on pandemic risk. But insurers cannot solve every societal problem. Insurers can only commit capital responsibly on a broad scale for risks that meet the tests of insurability.
It is important to understand not only the limited role that insurers can play but, more importantly, why insurers cannot broadly insure pandemics. It is also important to understand which pandemic losses are well-suited to insurance and which require a pure-government or alternative solution.
Insurers provide vital economic protections to our policyholders. It is because of our products that businesses can operate, employ workers, and prosper with the assurance that a fire or other peril will not ruin their business forever and that their workers are protected from on-the-job injuries.
When COVID-19 first widely manifested in early 2020, consumers were concerned about potential transmission of the coronavirus from contamination of physical surfaces as well as human transmission. However, according to the United States Centers for Disease Control, one of the most important recent scientific findings is that COVID-19 is not generally transmitted by surface contact and there are no extensively publicized cases of that occurring.
As we have seen during the COVID-19 crisis, significant economic losses resulted from the human behavior that ensued from the pandemic, when people’s daily habits and commerce changed dramatically to avoid human-to-human interaction. Analysis by APCIA as well as the Economic Journal of the University of Chicago determined that most pandemic economic losses were caused by a macro-economic plunge in consumer demand for in-person services, not by physical damage or government closures. Insurance has never covered shifting macroeconomic consumer demand, and is not well-suited to do so.
In the past, governments have facilitated making insurance available for exposures that became problematic to insure – or unaffordable for consumers – such as terrorism, flood, and crop exposures. In the United States, this has been done through shared programs like the Terrorism Risk Insurance Program, the National Flood Insurance Program, and the federal crop insurance program. These programs are tailored to address the specific issues that made insuring those risks problematic. Pandemics are different from those risks. Pandemics violate so many of the requirements for insurability that insurers have never offered insurance for them, except in very limited circumstances, such as event cancellation.
Additionally, unlike other risks, pandemics are not isolated in certain regions; they are widespread and impact the vast majority of the global population simultaneously. Insurance works when it is purchased by large numbers of policyholders, but only a small fraction of those who purchase it suffer a loss. Pandemics fail to meet this principle.
Policymakers and the industry have largely focused discussion of prospective pandemic solutions on providing broad business continuity protection, trying to shoehorn it into business interruption insurance, which sounds similar. However, business interruption insurance is a property insurance policy that covers actual physical loss of or damage to covered property. As we have already noted, COVID-19 business losses have been primarily from the macroeconomic plunge in demand for in-person services, not property damage.
A couple of the very largest insurers have suggested that, for the right price, they can underwrite anything in very limited quantities. But that does not suggest that those risks are broadly insurable any more than arguing that GDP growth can be insured. Trying to create a public-private partnership to force the industry to draw boxes around an uninsurable risk does not result in good public policy – it just forces extreme costs and consequences onto a system that will result in higher costs for consumers.
During this unprecedented time, insurers have remained focused on our promise to our customers – paying every covered insurance claim related to the pandemic, just like we have for other major events. Insurers also refunded premiums, suspended cancellation and nonrenewal of insurance policies, extended time periods to file insured claims, and made other accommodations for their customers. In addition, insurers have paid claims in record numbers resulting from a remarkable year of natural and man-made catastrophes, including devastating hurricanes, destructive wildfires, and prolonged social unrest. According to Aon, insured catastrophe losses in the U.S. amounted to $66 billion for 2020, an amount that was significantly higher than the previous 10-year average of $46 billion.
There is not an insurance solution for all of society’s problems, and the economic hardships created by pandemics like COVID-19 must be addressed through government intervention. With all the arguments over potential solutions, it is clear that it is increasingly important to understand and secure agreement on the nature of the problems to be solved. And there is now extensive evidence that that there are several critical economic problems resulting from a pandemic, and most are broader macro-economic problems insurance is not designed to address.