Tag Archives: Pandemics

No Surprises: How Insurers and Their Customers Benefit from Financial Education

By Sean Kevelighan, CEO, Insurance Information Institute

Sean Kevelighan

Insurers have responded quickly and effectively to 2020’s extraordinary volume of hurricanes, wildfires, and civil unrest. These events are resulting cumulatively in billions of dollars in insured claim payouts.  

Yet a recent Forbes article stated that the owners of one of the largest Broadway theater chains were “shocked to learn that its insurance companies would not cover most of its losses during the COVID-19 pandemic.”

Making people more prepared and resilient is our fundamental goal at the Insurance Information Institute (Triple-I). We seek every opportunity to educate customers about how their insurance works before they suffer an insured loss. Part of this mission is to explain how pandemics are uninsurable. That’s because, unlike covered events, which are limited in time and geography, pandemics simultaneously affect everybody. This is something we’ve explained in briefings to legislators, legal experts and consumer and trade media.

Large-Scale Solutions to Large-Scale Problems

As a result, a consensus is forming around the idea that the federal government is the only entity with the reach and financial resources to help businesses recover from an event the magnitude of a global pandemic. It’s in this spirit that we help inform public discussions about the need for a federal governmental role in protecting the U.S. against future pandemics.

Still, while insurers, regulators and the U.S. government work to deliver relief to business financially affected by future pandemics, we need to stay focused on the present. And to do this, we need to take a quick look into the past:

Insurance has been around for 350 years as a way for households, businesses and communities to recover and rebound after wildfires, hurricanes and other catastrophes. Time and again insurers have been there for their customers because that’s what they do. For example, in the months after 9/11, insurers paid out tens of billions of dollars to keep affected businesses afloat while New York and Washington, DC rebuilt from the rubble.

In 2020, insurers continue to perform their vital societal role, covering insured losses from record hurricane and wildfire seasons, as well as the most destructive civil demonstrations in more than a quarter-century. Insurance simplifies a rather complex risk management process and creates products that deliver simpler ways for people to be more prepared and resilient. Covering these hazards demands immense capital resources.

Questions? Your Policy Documents Have the Answers

Insurance is heavily regulated, and as the Triple-I reaffirmed at September’s annual summit of the National Association of Insurance Commissioners (NAIC), the industry we represent relies on a strong working partnership with regulators and government agencies across America to help make insurance work better for everybody.

One of the tangible results of this partnership is something that anybody can literally hold in their hands: insurance policy documents. Reading these documents to understand what you’re purchasing is an essential part of preparedness.

Business income (interruption) or BI insurance losses caused by a pandemic are not covered because direct physical damage, such as that caused by a hurricane or a fire, is what triggers a standard BI policy. As many courts and academics around the country have stated, neither a virus nor bacteria leads to the direct physical damage of a business’s structure. This contract language is well-established; moreover, every policy is approved by individual states before they are issued to BI policy holders.

We view it as a success when nobody is shocked by what’s covered, and what’s not, under their insurance policies. This is why the Triple-I regularly urges business owners to become familiar with their insurance documents and have regular conversations with their agent or broker to discuss anything they don’t understand.

In an age when we’re all accustomed to just clicking the “terms and conditions” box, ignoring agreements, paradoxically, has become something everybody can agree with. Social scientists consider this to be a form of cognitive dissonance: We know we should read our insurance policies, and yet few of us do. This is a behavioral pattern we’re all guilty of and the Triple-I understands there are many demands on a customer’s time.

Which brings us back to an essential point, that insurance companies prioritize their efforts and resources into making sure that everybody knows about the coverage they have and need.

Pandemics are uninsurable because insurers don’t collect premiums to cover business losses due to viruses and other pathogens. There are products available for this purpose, but an overwhelming majority of businesses decline to purchase them. These exclusions and the availability of pandemic insurance is a fact well known by many experienced professionals—notably risk managers and trial attorneys. The Triple-I is willing to work with anybody to make the public better aware of the risks and how to prepare for them.

The next pandemic surely will come. How insurers, their customers, and the federal government respond now will ensure our resources and energies are devoted to saving lives from all the threats the U.S. faces.  

Pandemic Insurance Was Available. Why Didn’t Businesses Purchase It?

By James Ballot, Senior Advisor, Strategic Communications, Triple-I

Business interruption policies generally exclude losses from closures due to virus or bacteria. Yet insurance against losses due to a pandemic like COVID-19 did in fact exist well before the first case of COVID-19 was reported in the U.S. A recent Wired article, We Can Protect the Economy From Pandemics. Why Didn’t We? gives an in-depth look at the origins and development of pandemic insurance–and why it was ignored by business owners and risk managers who potentially stood to gain the most (or lose the least) from having it.

On the surface, the article’s author recounts the sort of innovation and ingenuity that most of us familiar with insurance can easily recognize. But just beneath is a fascinating glimpse at how insurers, virologists and epidemiologists, and data scientists devised ways to understand and rationalize the economics of outbreaks—and at the amazing race to quantify and price pandemic risks to bring an insurance product to market.

“Reinsurance is sometimes called the business of a hundred professions … you don’t just have mathematicians and lawyers and businessmen. You have former mining engineers. You have former captains who steered ships across the ocean. You have art experts who are specialized in art insurance. It is, if you like, always close to life.”

–from, We Can Protect the Economy From Pandemics. Why Didn’t We?

Like many significant advances, pandemic insurance started from a conventional, even humble proposition. In 2011, with the 2008 Ebola outbreak still fresh in the collective memory, Gunther Kraut, then a young quantitative analyst at Munich Re, studied ways for his firm to hedge its life insurance portfolio against a “one-in-500-year return period.”

Kraut later partnered with Nathan Wolfe, a globetrotting rock-star virologist, and Nita Madhav, an epidemiologist who’d spent 10 years modeling catastrophes for the insurance industry, to create what was essentially a new consciousness about pandemic risk—and tools to help mitigate potentially immense losses.

Without trifling, this is a gripping saga involving global NGOs, multinational corporate giants, visionary business derring-do, and catastrophic failures of the imagination. But from its pages, we get a fuller understanding of insurance as a pervasive force that, in spite of its sophistication, ubiquity and capacity for good, nevertheless sometimes bows to the principles of behavioral economics.  

All about pandemic catastrophe bonds

In previous articles, we discussed how communicable diseases and pandemics are (or are not) addressed in personal and commercial insurance policies. Today, we’ll talk about pandemic catastrophe bonds.

The Ebola outbreak between 2014 and 2016 ultimately resulted in more than 28,000 cases and 11,000 deaths, most of them concentrated in the West African countries of Guinea, Liberia, and Sierra Leone.

The outbreak inspired the World Bank to develop a so-called “pandemic catastrophe bond,” an instrument designed to quickly provide financial support in the event of an outbreak. The World Bank reportedly estimated that if the West African countries affected by the Ebola outbreak had had quicker access to financial support, then only 10 percent of the total deaths would have occurred.

But wait, what are “catastrophe bonds” and what’s so special about a pandemic bond?

“Traditional” catastrophe bonds

Like good old-fashioned insurance, catastrophe bonds are a way to transfer risk, often for natural disasters. They usually work like this: investors buy a high-yield bond issued by an insurance company. If a specific qualifying event occurs, such as if claims from a natural disaster exceed a certain amount (an “indemnity trigger”), the bond holders forfeit the principal of the bond, which goes to the insurer to help defray costs.

Catastrophe bonds are high-risk investments – hence the high yields they pay to investors to compensate for that risk. After all, there’s a pretty good chance a sizeable hurricane will hit in any given year.

Pandemic catastrophe bonds

Pandemic catastrophe bonds are similar. An entity (like the World Bank) sells a bond, which pays interest to the investors over time. If certain triggers occur, then the principal from the bond sale is quickly funneled to medical efforts to contain and quell the disease outbreak. That way, affected regions don’t have to wait for aid money to be raised and coordinated.

Pandemic bonds are somewhat different from traditional catastrophe bonds, though. Remember, traditional catastrophe bond triggers are usually based on insurance losses (indemnity triggers), which don’t make much sense in the context of a disease outbreak. Insurance losses can take quite some time to adjust and finalize.

There’s no time for that kind of thing when we’re dealing with a pandemic. Capital needs to move quickly to the affected region. So if a trigger can be quickly determined, then the capital payouts can be made quickly as well.

That’s why pandemic bonds are triggered by, for example, the number of patients or the speed of disease spread (a “parametric trigger”). Parametric triggers are usually objectively verifiable, such as how many cases of a disease have been reported in a given time. Once that trigger is activated, the bond gets to work. No further adjustment needed.

Why are catastrophe bonds useful for fighting pandemics?

And that’s what makes pandemic bonds attractive for addressing disease outbreaks: speed. Since pandemic bonds are not triggered by losses, but rather by the actual, real-time spread of the disease, capital can flow much faster than if it had to wait until insurance losses began rolling in. That means near-immediate financial support for health clinics, aid workers, containment efforts, and more.

Indeed, the speed of capital flow to emergency response is crucial for pandemics. Global supply chains and interchange, not to mention the exponential growth in international travel, mean that disease outbreaks can spread much faster and can cause much more widespread damage than in the past. The faster a disease can be nipped in the bud, the fewer people infected – and the less disastrous the outbreak.

Pandemic bonds in the real world

In 2016 the World Bank developed the Pandemic Emergency Financing Facility (PEF), which created, in part, a pandemic catastrophe bond to help provide capital in the event of another disease outbreak in West Africa. The PEF is triggered by number of deaths, speed of disease spread, and the spread of disease across international borders, and provides coverage for six viruses, including Ebola. The program has been supported by private reinsurers as well, including Munich Re and Swiss Re.

You can learn more about the PEF here.

Commercial insurance, diseases and epidemics

In a previous article, we discussed how personal insurance policies address communicable diseases and epidemics. In this article, we’ll look at how commercial insurance policies handle these issues.

Between 1918 and 1919 the so-called Spanish influenza pandemic* killed at least 50 million people worldwide and infected about 500 million people – or about 1/3 of the entire world’s population at the time.

While the Spanish flu’s destructiveness has been an outlier over the last several decades, epidemics and pandemics on a smaller scale do still happen (avian flu, swine flu, Ebola, etc.).

How could disease outbreaks impact commercial property and general liability insurance?

[Content warning: wonky]

Continue reading Commercial insurance, diseases and epidemics

Personal insurance: diseases and epidemics

In this article, we discuss how personal insurance policies address communicable diseases and epidemics. In a later article, we’ll look at how commercial insurance policies address these issues.

Measles are back with a vengeance. It’s gotten so bad in one New York county that the local government tried to ban unvaccinated children from public spaces.

Little known fact to people outside the insurance world: many personal insurance policies address communicable diseases and epidemics. Let’s walk through some of them.

Homeowners liability insurance: probably not covered

If you crack open your handy HO-3 standard homeowners policy and flip to Section II – Liability Coverages, you’ll notice that the transmission of a communicable diseases that causes any bodily injury or property damage is not covered by the policy. What this basically means is that if you (the insured) cause someone to get hurt (i.e. sick) via a communicable disease, whether you knew you were sick or not, then the policy won’t cover you for any liability if you get sued.

So if someone without a measles vaccination throws a party and ends up getting several guests sick, that person’s homeowners policy probably won’t cover any liability arising out of their actions. Doubly so if the person did this purposely: intentional acts are excluded from pretty much every insurance policy on earth.

Personal liability umbrella: probably not covered, but it depends

A personal liability umbrella policy is basically an extra layer of liability insurance. It will cover some types of liability your homeowners insurance excludes – and will also cover higher payments, sometimes up to $1 million (homeowners is often limited to $300,000).

Personal umbrella policies will also often exclude liability arising out of the transmission of a communicable disease. But not always, since what constitutes a communicable disease often depends on the specific policy. Some policies only exclude sexually transmitted diseases; others will exclude any communicable disease.

Travel insurance: could be covered, depending on the situation

Travel insurance policies can vary dramatically, depending on the insured’s needs. Two of the more common coverages are for trip cancellation and emergency medical treatment.

Will travel insurance cover you if a trip gets cancelled due to an epidemic or pandemic? Again, depends on the policy, but probably not. Many travel policies will exclude losses caused by disease outbreaks.

What if you get sick and need to cancel your trip? Unfortunately, you’re probably not covered if you got sick because of an epidemic. But for other diseases, you could be covered, depending on the insurer and a whole laundry list of conditions. For example, a sickness that would be covered often requires that the sick person be so ill that they can’t travel (a mild cough won’t pay out); the sick person is also often required to have a medical professional confirm that they were, in fact, too sick to travel.

If you have emergency medical treatment coverage, then you’ll be covered for any covered medical care, including illness. However, these kinds of policies can get very complicated; it’s important to talk to your agent to make sure you are getting the coverage that you need.

Global Pandemics Top Extreme Risk Worry

A global pandemic is the most important extreme risk for the insurance industry to worry about in the long term, according to a survey of global insurance industry executives conducted by Towers Watson.

Rounding out the top three extreme risks of concern are a large-scale natural catastrophe and a food/water/energy crisis, the survey found.

Other top 10 extreme risks named in the Towers Watson survey include cyber-warfare, an economic depression, a banking crisis and a default by a major sovereign borrower.

Votes were compiled in a wiki survey which enabled participants to add their own ideas. Over 30,000 votes were cast.

Meanwhile, a new report by AonBenfield says pandemic risk remains the most important mortality exposure for the insurance industry and is placed above other forms of catastrophic event including natural catastrophes, nuclear explosions, and terrorism.

In Pandemic Perspective, AonBenfield points out that according to historical data, pandemics are large enough to destabilize the insurance market more than once every 200 years, with three global pandemics recorded in each of the last three centuries.

This suggests that the majority of people working in the insurance industry today are likely to face at least one pandemic during their careers. Insurers should be aware that now is the time to anticipate and educate themselves on pandemic risk, and begin to model it.†

Check out I.I.I. facts and statistics on mortality risk.

Pandemic Risk and Capital Markets

Reports on the H1N1 virus continuing to cause illness, hospitalizations and deaths in the U.S. during the normally flu-free summer months and newly issued vaccination guidelines from the Centers for Disease Control and Prevention (CDC) are raising concerns on pandemic risk. This may prove an area of future growth for the capital markets as life insurers increasingly look to alternative risk financing as a way to raise additional capital and transfer pandemic risk. For example a new report from Swiss Re suggests that securitizations of extreme mortality risk will continue to expand as more large global life insurers and reinsurers adopt these tools to hedge exposure to pandemic risk. Swiss Re notes that the combined volume of extreme mortality bonds issued so far is $2.2 billion, a miniscule amount compared to the face amount of mortality risk insured globally. “It is difficult to estimate precisely the market potential for this type of securitization because it refers only to extreme mortality, but it will likely fall in the range of $5-20 billion by 2019,† Swiss Re says. Mortality securitizations are simpler than other life securitizations and investors are more comfortable with the underlying insurance risk, it adds. Check out I.I.I. information on alternative risk financing options.