Insurance for economic losses caused by pandemics
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Insurance for economic losses caused by pandemics Robert Hartwig1 · Greg Niehaus1 · Joseph Qiu2 Received: 13 July 2020 / Accepted: 25 August 2020 / Published online: 14 September 2020 © International Association for the Study of Insurance Economics 2020
Abstract Private insurance coverage for economic losses caused by pandemics is limited. While many factors contribute to reduced demand and supply, we attribute the low amount of coverage to the high levels of capital that would be required to credibly insure pandemic economic losses with cross-sectional pooling mechanisms. Pooling over time significantly reduces the required capital and therefore the cost of insurance, but as a practical matter likely requires a government with the ability to borrow and tax. We also argue that insurance for economic losses due to pandemics likely generates positive externalities for the macroeconomy. We therefore analyze the general tradeoffs associated with different ways that a government can promote such insurance. Keywords Pandemic · Insurance · Public Policy · Capital
1 Introduction Pandemics are a recurring natural phenomenon that throughout human history have caused not only widespread sickness and death but also economic disruption on a massive scale. The COVID-19 pandemic is no exception, with the International Monetary Fund estimating global economic losses at $9 trillion (IMF 2020b). But unlike other economically destructive natural phenomena such as hurricanes, earthquakes and wildfires, the losses from which are substantively financed by private insurers (at least in advanced economies), very little private insurance exists to manage the financial consequences of pandemic risk. Indeed, very few products have ever been brought to market by private property–casualty insurers. This All errors and omissions remain the authors’ responsibility. Opinions stated in this paper are the authors’ personal views. * Greg Niehaus [email protected] 1
Darla Moore School of Business, University of South Carolina, Columbia, USA
2
American Risk and Insurance Association (ARIA), Malvern, USA
Vol:.(1234567890)
The Geneva Risk and Insurance Review (2020) 45:134–170
135
paper examines the failure of private insurance markets and alternative risk-sharing mechanisms to adequately address economic losses arising from pandemics. The paper also identifies potential reasons for the lack of insurance, as well as potential solutions. The analysis and discussion are divided into three parts. In the next section, we describe the current marketplace for pandemic insurance. While there are examples of private insurance coverage for pandemic losses, the market for private pandemic insurance is exceedingly thin in the sense that coverage options, especially those for business interruption, are extremely limited or nonexistent for most individual entities. Payments by private insurers to businesses suffering economic losses associated with the COVID-19 pandemic are expected to account for only a small fraction of total economic losses. In Sect
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