Creating insurance coverage for a pandemic

By May 2020, it was quite clear that the United States — along with the rest of the world — was deeply involved in a deadly and economically disastrous COVID-19 coronavirus pandemic, and there was little individuals or corporations could do to help themselves except to turn to governmental (state and federal) programs. But scientists and medical experts had been warning for decades that a pandemic was “overdue,” yet even when word came of one beginning in China, governments did nothing.

As a co-author of “Catastrophe Claims — Insurance for Natural and Man-made Disasters,” we had a brief section on pandemics, suggesting that it was primarily a life and health insurance issue. But is that all? Could it be a casualty insurance issue as well?

Many insurers learned following the 2008 financial crisis why the Committee of Lloyd’s, London, in 1936 wrote a rule forbidding the underwriters to write “financial guarantee insurance.” They were forbidden to underwrite “(a) the financial default or insolvency of any party; (b) the financial failure of any venture; (c) the shortage of receipts, sales or profits of any venture; or (d) lack of support,” adding “unless it is a condition of the insurance that any loss recoverable must be a direct result of a specified contingency, which is not precluded.” The 21st-century “credit default swaps” met those proscribed criteria.

Elements of an insurable peril

Almost any elementary insurance course explains what is required for a peril to be considered “insurable.” Robert I. Mehr and Emerson Cammack (Principles of Insurance) outline seven criteria for an insurable exposure:

1. A large group of homogeneous exposure units.
2. Definite loss.
3. Accidental loss. (“Fortuitous”)
4. Large loss.
5. Economically feasible cost.
6. The chance of loss must be calculable.
7. Unlikely to produce loss to a great many at the same time.

Does a “pandemic” meet any — or all — of these criteria? The first four are easily met, but it is the fifth, sixth and seventh criteria that could determine if an underwriter would accept the risk of a pandemic. Could the cost be calculated as “economically feasible”? Perhaps, if the coverage was specifically limited by a period, dollar limit of liability, and conditions and exclusions for the insuring agreements.

See more: Preparing for disaster – a checklist

Necessary policy factors

For example, with a time deductible of, say, one month from when the government first declares a national emergency and imposes restrictions on businesses, or the individual insured (in a personal policy) is terminated from employment, and for a limited period of 12 months beyond that date, many pandemics might be brought under control within that period. As in a disability insurance policy, the policy would pay either a stated amount monthly or a percentage of the proven monthly salary or business income of the insured.

The chance of loss must be calculable. In a personal policy, loss – and probably premium – would be based on the insured’s average annual income. For a commercial insured, such as a small business, the calculation would be similar to that in a business income property form. But such commercial coverage would probably need to have contingency conditions, where the business is relying on a supplier or a specific customer, and that party is also affected by the pandemic.

Finally, is a pandemic peril “likely to produce loss to a great many at the same time”? By the very nature of a “pan” epidemic, the answer would be obvious, with one caveat: Just as a “flood” is likely to produce loss to many at the same time, experience shows that many, if not most, do not have flood insurance, relying (as is the case in the COVID-19 pandemic) on government social programs to bail them out. Therefore, it is likely that if pandemic insurance was available, only a very limited number of the exposed population or businesses would purchase the coverage, hence from year-to-year such insurance could be profitable.

There would have to be conditions and exclusions. Notice and cooperation would, of course, be required, but certain causes of a pandemic — or national panic — would have to be excluded, including terrorism or war (biological or chemical weapons) and nuclear radiation. No insurer could accept such risks. Another issue is workers’ compensation. There has been little mention in the insurance press about whether insurers are accepting as workers’ compensation COV-19 hospitalizations, disabilities or deaths as compensable. For emergency and medical employees, this would seem to qualify as a legitimate “occupational disease,” depending on state definitions.

Perhaps the insurance industry is missing a potential market for future pandemics. It all depends on how the insuring agreements, exclusions and conditions are written. Everyone eventually dies, but life insurance companies do quite well insuring their policyholders, as do the disability insurers. Why not pandemic insurers?

Ken Brownlee, CPCU, ARM, (kenbrownlee@msn.com) is co-author of “Catastrophe Claims – Insurance for Natural & Man-made Disasters” published by Thomson Reuters West.

Related:

• 7 steps to prepare for the coronavirus claim tsunami
• Workers’ compensation will rise to the challenge against COVID-19
• A consumer’s guide to disinfecting after COVID-19