Insurance for economic losses caused by pandemics

Providing pandemic business interruption coverage with double trigger cat bonds

The aim of this paper is to show how qualified investors in cat bonds can offer adequate pandemic business interruption protection in a comprehensive public-private coverage scheme. First, we propose a numerical model to expose how cat bonds can contribute to complement standard re/insurance by improving coverage of cedents even though risks are positively correlated during a pandemic. Second, we introduce double trigger pandemic business interruption cat bonds, which we name PBI bonds, and discuss their precise characteristics to provide efficient coverage. A first trigger should be pulled when the World Health Organization declares a Public Health Emergency of International Concern (PHEIC). The second trigger determines the payout of the bond based on the modelised business interruption losses of an industry in a country. We discuss moral hazard, basis risk, correlation and liquidity issues which are critical in the context of a pandemic. Third, we simulate the life of theoretical PBI bonds in the restaurant industry in France by using data gathered during the COVID-19 pandemic.

Securitization of pandemic risk by using coronabond

This article investigates the pandemic risk coverage within the European Union member states through insurance securitization. This strategy allows the transfer of health risks from the insurance market to the financial markets. We focus on the financial market crisis caused by the COVID-19 pandemic to securitize the losses caused by the latter. Over the period from 24/01/2020 (the first proven case of contamination in Europe) to 31/03/2020 (end of the dramatic decrease in financial markets), we apply the extreme value theory allowing the selection of the trigger threshold. We identify an immediate reaction of the financial markets following a pandemic shock, the effect of which fades after a few days. The response of stock market indices, measured by the fluctuation of return rates, is not very high. Nevertheless, the reaction of the financial markets is sufficient for the corona bond triggering, provided that the threshold for triggering the incidence rate is optimal. In addition, the securitization of insurance risk could be an alternative process to the classic risk transfer techniques such as co-insurance and reinsurance. Finally, a reinsurance pool dedicated to the insurance scheme's management against the effects of a pandemic is crucial for insurance securitization. These results could have implications for various actors such as insurers, financial investors, and States.

The possibilities and limits of insurance as governance in insuring pandemics

Insurance can, as has clearly been indicated in the literature, play an important role in dealing with catastrophe risks, not only as a compensation mechanism but also as a mechanism to influence the behaviour of the insured. It is the concept known as 'insurance as governance'. However, we argue that there are limited possibilities for this role as far as the insurance of pandemics is concerned. The traditional technical tools, such as risk-based pricing, are difficult to apply. In addition, there may, ab initio, be serious problems in insuring pandemics within one of the main conditions of insurability (controlling moral hazard through an effective risk differentiation). One remedy that is traditionally applied, more particularly for natural catastrophes, is mandatory coverage. Furthermore, the capacity problem might potentially be solved through a multilayered approach in which, in addition to insurance and reinsurance, the government could also take up a role as reinsurer of last resort. That would also have the major advantage of stimulating market solution (and potentially providing incentives for the mitigation of damages), which clearly fails in a model where the government simply bails out operators. Finally, one important regulatory intervention is that insurers should be better informed than was apparently the case during the last pandemic about exactly which type of risks are covered and which are not.

Reinsuring pandemics: the role of government and public-private partnerships between reinsurers and governments

Pandemic-related business interruption (BI) losses are generally considered 'uninsurable' because, in order to pool sufficient premium revenue to meet valid claims, premiums would be unaffordable for the majority of policyholders. This paper explores whether and how such losses might be made insurable in the U.K. The authors consider post-pandemic governmental responses, including the role of the Financial Conduct Authority (FCA) and the meaning and implications of FCA v Arch Insurance (U.K.) Ltd ([2021] UKSC 1). The central premise of the paper is to highlight the importance of reinsurance in increasing an underwriter's insuring capacity and to illustrate how, with the support of government in the form of a public-private partnership (PPP), 'uninsurable' risks of this type may be made insurable. The authors propose a PPP, 'Pandemic Business Interruption Re', which provides, in their view, a feasible and defensible solution that would confer the benefit of increasing policyholders' faith in the industry's ability to underwrite pandemic-related BI claims and reduce reliance on ex post government aid.

A pandemic business interruption insurance

We analyze how pandemic business interruption coverage can be put in place by building on capitalization mechanisms and a portfolio management strategy. As evidenced with COVID-19, pandemics affect economic sectors in differentiated ways: some are very severely affected because their activity is heavily impacted by travel bans and constraints on work organization, while others are more resistant. This opens the door to risk-coverage mechanisms based on a portfolio of financial securities, including long-short positions and options in stock markets. We show that such a strategy allows insurers to offer business interruption coverage in pandemic states, while simultaneously hedging the risks associated with alternating bullish and bearish non-pandemic states. These conclusions contrast sharply with the idea of governments being the only solution to the pandemic insurability problem. They are derived from a theoretical model of corporate risk management, and their practical relevance is illustrated by numerical simulations, using data from the French stock exchange.

Did COVID-19 change life insurance offerings?

The profitability of life insurance offerings is contingent on accurate projections and pricing of mortality risk. The COVID-19 pandemic created significant uncertainty, with dire mortality predictions from early forecasts resulting in widespread government intervention and greater individual precaution that reduced the projected death toll. We analyze how life insurance companies changed pricing and offerings in response to COVID-19 using monthly data on term life insurance policies from Compulife. We estimate event-study models that exploit well-established variation in the COVID-19 mortality rate based on age and underlying health status. Despite the increase in mortality risk and significant uncertainty, the results generally indicate that life insurance companies did not increase premiums or decrease policy offerings due to COVID-19. Nonetheless, we find some evidence that premiums differentially increased for individuals with very high risk and that some policies were removed for the oldest of the old.

The impact of the Covid-19 pandemic on the business interruption insurance demand in the United States

The article investigates the Covid-19 pandemic related changes in the demand for insurance services in the Unites States due to business interruptions by employing panel vector autoregression models to a dynamic panel data set of 50 states and District of Columbia for three periods of time: 01 January, 2004 to 28 June, 2020; 01 January, 2004 to January 21, 2020 (pre-Covid period); January 22, 2020 to June 28, 2020 (Covid-period). This paper is the first attempt to obtain estimates by applying Google Trends with a search key word "Business Interruption Insurance". The data was collected and reduced to a single scale by US states within the widest possible time span. Google Trends Hits and Initial Claims for Unemployment Insurance Benefits are used as endogenous variables in the built models. In the constructed models, the impact of the exogenous variable New Covid Cases is compared with that of over US billion-dollar natural disasters. The impulse responses show a positive relationship between the Google Trends Hits and Initial Claims with the Covid-factor having a significant impact on the responses. The conducted analyses reveal that the demand for insurance services due to the Covid-19 outbreak in the United States can be expected to increase 2-6 times, with the total amount of the incurred costs for the economy due to the virus ranging from 0.3 to 7 percent of the US-2019 GDP. The results lay the foundation for recommending the insurance market participants to lobby for adoption of public-private protection schemes being able to secure a more efficient response to the pandemic-related losses that may occur in the future.

Pandemic risk: Impact, modeling, and transfer

COVID-19 has proven that pandemic risk deems to the type of catastrophe risk that needs to be treated seriously, by both society and the insurance industry. A key element to measure, manage, and transfer pandemic risk is the modeling capability. This paper first reviews the insured loss from COVID-19 and the impact on the insurance industry. Then, current pandemic risk modeling capabilities and how insurance industry uses these models are evaluated. Some suggestions are made in terms of how these models can be improved in the future and how they can assist in insuring the pandemic risk. Finally, the nonmodeling elements of pandemic risk transfer and the government's role are discussed.

Covid-19: implications for insurer risk management and the insurability of pandemic risk

This paper analyzes the insurability of pandemic risk and outlines how underwriting policies and scenario analysis are used to build resilience upfront and plan contingency actions for crisis scenarios. It then summarizes the unique "lessons learned" from the Covid-19 crisis by baselining actual developments against a reasonable, pre-Covid-19 pandemic scenario based on the 2002 SARS epidemic and 1918 Spanish influenza pandemic. Actual developments support the pre-Covid-19 hypothesis that financial market developments dominate claims losses due to the demographics of pandemics and other factors. However, Covid-19 "surprised" relative to the pre-Covid-19 scenario in terms of its impact on the real economy as well as on the property and casualty segment as business interruption property triggers and exclusions are challenged, something that may adversely impact the insurability of pandemics as well as the perception of the industry for some time to come. The unique lessons of Covid-19 reinforce the need for resilience upfront in solvency and liquidity, the need to improve business interruption wordings and re-underwrite the book, and the recognition that business interruption caused by pandemics may not be an insurable risk due to its large accumulation potential and the threat of external moral hazard. These insurability limitations lead to a discussion about the structure and financing of protection against the impact of future pandemics.