Photo by Martin Sanchez / Unsplash

Business Can’t Rely On Private Market Insurance In the Next Pandemic

Both capital capacity and modeling limitations mean that the private insurance and reinsurance industry will sit on the sidelines of global pandemics.

Chris Westfall
Chris Westfall

Private insurance and reinsurance companies played a “limited role” in the recovery from the COVID-19 crisis and policymakers should not expect the industry to step up in the next global pandemic, according to a new report from the United States Government Accountability Office (GAO).

The only solution to such large scale events are “non insurance” alternatives such as the pandemic era, taxpayer-backed Paycheck Protection Program (PPP) despite their own operational challenges, the GAO argues.

The GAO points out that global insured pandemic-related losses during the recent crisis resulted in payments of about $35 billion in property/casualty insurance claims by October 2021, representing less than one percent of the total economic impact of the pandemic.

“Most business insurance policyholders did not have coverage for business interruption, and the vast majority of policies with coverage required physical loss or excluded losses attributed to viruses and other microorganisms,” the report states.

Actuaries, insurance experts, insurers, and reinsurers interviewed by government researcher “generally agree” that pandemics risk is largely uninsurable because it does not meet key insurability criteria, according to the report.

“According to stakeholders, property/casualty insurers generally have taken steps to fully restrict or limit their exposures to future pandemic losses since the onset of the COVID-19 pandemic,” the report says. “As a result, some businesses have been operating with more uninsured risk than desired, because coverage is either unavailable or unaffordable.”

The report also notes that wile the insurance sector had the expertise to model the financial consequences of catastrophic risks such as natural disaster, existing risk-modeling techniques cannot accurately project losses from future pandemics.

“One group of risk modelers also stated that modeling losses from future pandemics involves a high degree of uncertainty,” the report states. “They said it is particularly difficult because losses depend on the characteristics of the pathogen, including the way transmission occurs and adapts over time, and consumer and local government responses.”

The GAO also pointed out that pandemic risk models are difficult and expensive to produce “because estimating losses may require access to a large volume of private industry data, considerable software and computing capability, and industry expertise.”