A challenge to insurability
Pandemic risk poses a challenge to insurability, as it is — by definition — global and potentially affects many individuals and economic sectors at once. This sets pandemic risk apart from risks that are insurable — ones that do not materialise everywhere and all at once — as it prevents the diversification and pooling mechanisms at the heart of insurance.
In practical terms, this means that while it is possible to cover a limited number of policyholders against pandemic risk in well-defined circumstances, insuring a very large group cannot be done relying exclusively on the principles of insurance and on the resources of the insurance industry alone. Pandemic risk therefore takes its place among similarly potentially large risks, such as natural catastrophes or terrorism, which require partnerships between public bodies and the private insurance industry in order to devise innovative solutions. It is important to note, however, that even natural catastrophes and terrorism do not share the same global nature intrinsic to pandemic risk; their potential losses are much lower and diversification can be achieved.
Despite posing a challenge to the principles of insurability, modelling the risks created by pandemics is not uncharted territory. Pandemic risk has been modelled by the insurance industry by using risk assessment tools to map certain scenarios and their expected consequences, allowing for the spread of a disease to be predicted with relative accuracy.
Pandemics are not isolated events, however, as they are accompanied by government efforts to reduce their negative effects. Preventive measures put in place by governments in the interests of public health — such as full or partial lockdowns of the economy and society — while effective in limiting the spread of a disease, significantly affect the insurance industry’s ability to assess, mitigate and price pandemic risk.
In the case of COVID-19, the economic losses have not arisen primarily from the pandemic itself but from government action to mitigate the impact of the virus on the population. Besides a pandemic’s global nature, it is this factor that also sets pandemic risk apart from other catastrophic risks, as it is closely linked to — and can be exacerbated by — political decisions.