Science

Can We Insure Against Future Pandemics?

In two days, the 2020 Summer Olympic Games will begin in Tokyo, Japan, one year later than originally planned because of Covid-19. Holding the Olympic Games during a recently declared state of emergency has generated a lot of debate. To protect athletes from exposure to SARS-CoV-2, the virus that causes Covid-19, on July 8 Olympic organizers banned all spectators from attending any of the 41 sporting events (International spectators had already been banned in March.)

If the Olympic Games are cancelled because of the pandemic, event insurance underwriters will be on the hook for $2 – $3 billion, which would be one of the largest payouts that the industry has ever covered. Covid-19 has already cost the global events insurance sector between $5 – $6 billion. And overall, the pandemic has cost the global insurance market as much as $37 billion

As SARS-CoV-2 spread across the planet in early 2020, plunging the global economy into a recession, lockdown measures exposed an extraordinary number of enterprises to an ugly truth about their business interruption policies: claims would not be paid either because of specific language excluding viruses or lack of physical damage to a property (the latter has been a standard “provable requirement”). Although court cases have subsequently ruled in the favor of policyholders over insurance companies, the lack of pandemic insurance policies given the number of infectious diseases that have emerged over the last twenty years (SARS, H1N1 influenza, Ebola, MERS, Zika, and Covid-19) is surprising. Wimbledon was an exception. After the 2003 SARS outbreak, the All England Lawn Tennis Club (AELTC) began paying annual pandemic insurance premiums of approximately US$1.9 million to numerous insurers that in 2020 paid out $141 million when the prestigious tennis tournament was cancelled. However, prior to Covid-19, interest in pandemic insurance was rare.     

AELTC had the foresight to think about the economic ramifications of a pandemic and how to mitigate future losses. But so did Nathan Wolfe, a virologist who once roamed the planet looking for new viruses. Before Covid-19, Wolfe tried to convince anyone who would listen that pandemic insurance is a good idea because, someday, it would be needed. But the problem that he ran into is that few people bought into his vision. I suspect Covid-19 has changed a lot of minds.

A report last year by Lloyds of London considers the issue. It concludes that the global insurance industry needs to do more in both the medium and long term. I completely agree. To this end, the report outlines a couple of new risk transfer mechanisms that may be useful. But ultimately, Lloyds concludes that pandemics are a systemic risk, i.e. a risk so wide sweeping that it threatens an entire social or economic system. The only actors large enough to insure against such systemic risks are governments. 

What’s really needed is to avoid having such a crisis in the future. This means building social systems that are more resilient to the kind of shocks caused by the Covid-19 pandemic, e.g. the global supply chain disruptions that affected food, pharmaceuticals, medical equipment, and many other goods and materials in 2020. It also means risk mitigation, which requires both infectious disease intelligence, to understand pandemic risks as they are evolving, and operational plans for response, which could be greatly improved.

Where I disagree with the Lloyds report is their frequent reference to pandemics as “black swan events”, i.e. sufficiently unpredictable that actuarial assessment is impossible. This is nonsense. The world has witnessed hundreds of outbreaks of novel pathogens in recent decades, not a few of which spread substantially from their epicenters. We have sufficient experience from which to learn if we are willing.

Insurance coverage for business disruptions due to epidemics is now a real need. If available, it would no doubt be purchased by many entities around the planet. Given our current approach to handling epidemics, I suspect the coverage would also be expensive. Thus, risk mitigation is essential. In the future, there will be more times where novel pathogens spillover into the human population. It would be wise for the insurance industry and local, regional, and global business sectors to plan now to offset associated losses.


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