A Framework to Assess the Role of Insurance in Future Pandemics
Insurers must establish a dialogue with policymakers to manage the risks of impending contagions.
- Howard Kunreuther and Jason Schupp
- June 2021
As businesses, nonprofits and local governments recover from the economic ravages of COVID-19, they are looking for tools to manage the risk of a future pandemic. This article introduces a practical framework that policymakers, insurance companies and other stakeholders can use to evaluate program design options and meaningful roles for the insurance industry and the public sector in providing financial assistance to individuals and firms impacted by business interruption (BI) and other potential losses from future pandemics.
We characterize the following three options for the property/casualty industry in managing the risk of future pandemics in the United States:
Status Quo (SQ) To date, there has been loose coordination of public and private responses to pandemic losses. SQ contemplates a similar loose coordination of private insurance with other financial services and the public sector in responding to BI and other losses (e.g., workers' compensation, liability, surety and event cancellation) during future pandemics.
Service Provider (SP) This option contemplates a nonrisk-bearing role for the property/casualty insurance industry whereby insurers provide underwriting expertise, marketing of pandemic risk-related products, and claims payment administration on a fee-for-service basis with respect to pandemic-related losses. The entire cost of pandemic-related claims would be publicly financed.
Service and Risk (SR) In addition to relying on the property/casualty insurance industry to act as a service provider, this option expands its role to include committing capital to cover a specified layer or other defined element of losses from a future pandemic. SR contemplates that insurers would price pandemic risk coverage in a manner that sends economic signals encouraging mitigation and other loss reduction measures without imperiling the financial viability of the insurance industry.
The proposed framework and guiding principles are designed to promote and guide a productive dialogue on appropriate roles for the insurance industry and public sector in addressing losses from future pandemics and potentially other catastrophic risks.
The following three guiding principles are proposed for evaluating the above options:
Principle 1: Charging risk-based premiums to the extent possible. Premiums that reflect risk from future pandemics provide businesses with clear signals as to the nature of the hazards they face and, to the extent feasible, encourage organizations to engage in cost-effective mitigation measures to reduce their vulnerability and their insurance costs.
Principle 2: Dealing with fairness and affordability issues. Any special treatment given to businesses that cannot afford risk-based insurance premiums should come from public funding and not through insurance premium subsidies.
Principle 3: Developing risk management strategies ex ante. In advance of a pandemic, the public sector can develop well-enforced regulations and standards to reduce losses and deaths from a future pandemic.
The following three practical steps should be considered in facilitating a dialogue among insurers and other interested parties, such as regulators, legislators and businesses, regarding the potential role of the industry in assisting businesses, nonprofits and the public sector in managing the risk of future pandemics:
Define a pandemic relief strategy. The dialogue among stakeholders should first define the relief to be delivered during a pandemic, including the recovery period.
Evaluate, improve or set aside existing COVID-19 pandemic relief programs. Consider which programs developed or deployed during the COVID-19 response should stay in place for future pandemics, should be improved or should be abandoned.
Pinpoint the role insurance can play in the pandemic relief strategy. The dialogue among stakeholders can focus on exploring and debating the potential to expand the role of the insurance industry as part of a private-public partnership for addressing future pandemic risks.
The proposed framework and guiding principles are designed to promote and guide a productive dialogue on appropriate roles for the insurance industry and public sector in addressing losses from future pandemics and potentially other catastrophic risks. The importance and opportunity to address this issue now, while it is still high on everyone's agenda, cannot be overemphasized.
For more details on the framework see the Wharton Risk Center Issue Brief, Framework for Evaluating Role of Insurance in Managing Risk of Future Pandemics. (Framework-for-Evaluating-the-Role-of-Insurance-in-Managing-Risk-of-Future-Pandemics.pdf (upenn.edu))
Best’s Review contributors: Howard Kunreuther is the James G. Dinan Professor Emeritus of Decision Sciences and Public Policy, and co-director of the Risk Management and Decision Processes Center at the Wharton School, University of Pennsylvania. Jason Schupp is the founder and managing member of Centers for Better Insurance. They can be reached at firstname.lastname@example.org and email@example.com. Support from the Alfred P. Sloan Foundation and the Wharton Risk Management and Decision Processes Center is gratefully acknowledged.