Insurance is a financial product which is based on social need. It does not serve just the interest of one but of many. From regulations through academic theory, it is accepted and required that “the business of insurance is to serve the public trust.”
I am thinking a lot about that concept now that the world is faced with an economic shut down caused by a pandemic. Individual property and commercial insurers have traditionally been reluctant to take on widespread and mass disasters because, from an actuarial standpoint, the risk of ruin is greatest with these calamities.
Historically, fire insurers were concerned about having too high a concentration of risk located in one city where one major fire could financially bankrupt an insurer’s surplus. Unfortunately, this happened far too often in the United States and resulted in the states establishing Departments of Insurance with audited solvency requirements for each insurer to meet before the state would issue a license for the insurer to sell policies.
As polices changed in the middle of the 20th century to cover multiple risks of loss, “all-risk” insurance is now the predominant form of coverage for commercial insurance. The general rule is that any “risk” is covered unless specifically excluded. The days of insurers having to worry about one a large-scale urban fire were replaced with concerns of widespread floods and earthquakes, which were often excluded risks of loss. Separate insurance could be bought for those perils for an additional premium.
With commercial interests becoming interdependent on a global economy, actuaries and underwriters also had to be concerned with global loss of Income from acts of terrorism which had much larger implications than just the specific target of the terrorist acts.
The Federal Government, recognizing that private insurers often refused to provide insurance coverage because of the large-scale risks, has established various programs of insurance in partnership with the private insurance for various risks of loss such as flood, crop, and terrorism insurance programs.
With the COVID-19 crisis, the federal government is once again being called upon to provide support as a backstop with an insurance program and as a partner to private insurance. Time will tell how this will work, but my prediction is that a Pandemic Risk Insurance Act (PRIA) will be established for future pandemics.
The pricing for such insurance covering loss of income from a pandemic is a statistical process. Will this risk of a pandemic be a once in a hundred-year event or is this something that is once in a generation? The frequency of events times the severity of the loss is a basic concern for determining the price of insurance. Pandemics can be off-the-charts severe for the amount of loss if they are worldwide. Their frequency is difficult to determine.
The point is that we as a society want to prepare for and hedge against these losses and that is the role of insurance. Given the huge financial stake, the insurance industry will be a major participant urging stakeholders to prevent and mitigate these terrible events. Insurance is more affordable when we control these out of control catastrophes.
The fire insurance industry was a leader preventing urban fires. While widespread wildfires are now a larger risk of loss, the large, out-of-control urban fire is a fairly remote event because of fire safety engineering supported in part by the insurance industry.
We will see greater leadership and concern for the control of future pandemics as we embrace loss mitigation and prevention strategies which those in the insurance industry will be encouraging if PRIA is passed. Insurance is a social product and society first wants to prevent the onset of these terrible events which cost human life and economic hardship.