Last Updated 2/1/2023
Issue: According to the Centers for Disease Control and Prevention (CDC), a pandemic is the sudden outbreak of an infectious disease spread over several countries or continents, affecting many people. Pandemics have the potential to affect all industries and could potentially affect insurers' operations and various lines of business across all insurance sectors. Pandemics can also disrupt financial markets, potentially impacting insurers' investments. However, unlike losses from weather-related catastrophes, losses from pandemics do not come from destruction of physical structures.
Pandemic Trends: Pandemics have been well-documented for centuries. Some of the most devastating pandemics have been the bubonic plague in the 14th century, the measles in the 16th century and smallpox in the 18th century. The 19th century witnessed tuberculosis, cholera, influenza and polio pandemics. The 20th century saw the influenza A (H1N1) pandemic and the acquired immune deficiency syndrome (AIDS) pandemic.
Coronavirus, Zika, and Ebola have heightened awareness of the pandemic threat. However, influenza pandemics have historically been the most prevalent pandemic threat, with about three occurring every century. Compared to seasonal flu viruses, pandemic flu can cause severe disease in young, healthy people, resulting in more illness and deaths. For instance, the highest mortality rate in the 1918–1919 Spanish Flu pandemic was in people aged 20–40 years. Children were the most affected in the 2009 H1N1 pandemic.
Managing the Industry Impact of Pandemic Risk: Pandemics could have serious consequences for insurers. Investing in pandemic preparedness and risk management is essential to mitigate operating difficulties and expected losses during a pandemic. Below are some of the ways insurers can address their vulnerabilities to pandemic risk.
- Business Continuity Planning
Like traditional disaster recovery plans, business continuity plans are best done well in advance of a pandemic. The goal is to maintain essential operations during times of workforce illness and stakeholder and supply disruptions.
- Investment and Business Mix
Invested assets can be diversified to offset their vulnerability to pandemic characteristics. Pandemics with longer durations and higher virulence will cause demand shock, resulting in high immediate effects on the economy. Demand for medical services and supplies will escalate. But, demand for other services will decrease as people seek ways to reduce the risk of illness. In contrast, pandemics with shorter durations and lower virulence will cause supply shock. As a result, illnesses and deaths occurring in the short-term will evolve into high absenteeism and productivity disruption in the long-term. Lower productivity on a massive scale could decrease domestic and foreign confidence and add uncertainty to the investment market. This could result in a flight to safer investments, placing domestic companies and global trade at risk.
Insurers also can mitigate against catastrophic mortality risk by controlling their mix of business. They may limit their in-force business to certain mortality risk tolerance levels. Mortality risk also can be offset by employing internal hedging strategies to their mix of business. This is most commonly done by taking on more longevity risk through annuity products. Premature death of annuity insureds during a pandemic serves, to a certain extent, as a natural hedge against rapid claim increases for life insurers. Additionally, insurers can hold a diversity of ages within their product portfolio. They also can diversify into other product lines less sensitive to pandemic risk.
- Risk Transfer
Reinsurance is a common tool insurers use to manage potential claim shocks from pandemics which allows insurers to transfer a specific portion or category of risk out of their portfolios to reinsurers' portfolios. Transferring these risks benefits insurers by stabilizing their earnings and increasing their capacity to issue more business. Stop-loss reinsurance is a common choice for protection from pandemic risk. Stop-loss is a form of nonproportional reinsurance where the reinsurer makes a payment if the ratio of claims to premium (claim ratio) exceeds a certain threshold, called the attachment point. Payments cease when the claim ratio reaches its exhaustion point. This offers the insurer protection against any sudden spike in claims experience during a pandemic. Excess-of-loss is similar to stop-loss, except coverage is related to a single loss event or risk. The World Health Organization (WHO) four-phase pandemic alert system is a common trigger point for many pandemic reinsurance treaties structured as catastrophe excess-of-loss. Another option is quota share, a form of proportional reinsurance, where the reinsurer assumes a specific percentage of every risk being reinsured. Thus, the insurer and reinsurer would share proportionally in all premiums and losses from a pandemic shock.
Insurers can also use industry loss warranties (ILW) to mitigate financial losses from pandemics. ILW contracts are based on industry loss experience instead of insurer-specific losses. Other risk-transfer options include insurance-linked securities and mortality swaps, in which a payment is triggered if a specific mortality index exceeds a certain level, up to its exhaustion point.
Capital market solutions for pandemic risk continue to evolve. In 2018, the World Bank launched the "pandemic bond" to provide funds to low-income countries facing a large-scale disease outbreak. The bond is the first insurance for pandemic risk and shifts the pandemic response focus from reactionary to proactive.
Pandemic Insurance: Though some insurance products for pandemics exist, they are usually too expensive for small businesses to purchase. Additionally, the availability of this type of insurance is limited because the risks are not well understood and difficult to price. However, the recent coronavirus pandemic may have small business owners seeking other options for future coverage, since losses related to viruses and bacteria are usually excluded in business interruption policies.
The coronavirus pandemic is renewing interest in the availability of pandemic insurance and companies are actively preparing products for the marketplace. Machine Cover, an insurtech, is designing a pandemic product based on parametric triggers that would offer quick payouts when certain metrics have been met. The company is anticipating release of the product in early 2021.
Another parametric pandemic insurance product, PathogenRX, existed prior to the coronavirus pandemic. The result of a partnership between Marsh, MunichRE, and Metabiota, PathogenRX was launched in May 2018, but no policies were sold.
Status: Pandemic exposure can present significant risk to insurers. To further explore the risk of pandemics to the health, life and P/C industries, the Center for Insurance Policy and Research (CIPR) held an event titled The Risk of Pandemics to the Insurance Industry on March 27, 2015 (this is a recent summary of key takeaways from the event). The event covered business continuity planning, the potential financial impact to the industry, modeling and risk management considerations, and capital market solutions.
In China, where the recent coronavirus outbreak originated, analysts predict minimal impact on the health insurance industry. Claims pertaining to the virus should be covered by health insurance, a sector that has only a small portion of the insurance market. According to Moody's, the number of residents with health insurance living in Wuhan, the epicenter of the outbreak, should keep insurance claims manageable. Only 4% of the insurance premiums underwritten in China cover central China, where Wuhan is located. Most insurance penetration occurs in the more affluent coastal cities where the coronavirus has had little impact. Additionally, the Chinese government plans to cover costs exceeding the existing policy amounts through government subsidies. Finally, reinsurance could partially cover losses for insurers.
However, the life insurance sales will likely be negatively impacted due to at least 55 million people under quarantine and the subsequent loss of business from consumers. The monetary loss is only expected to be temporary until the epidemic ceases.
In 2017, state insurance regulators, working through the Financial Analysis (E) Working Group of the Examination Oversight (E) Task Force, added guidance on pandemic prospective risk for health insurers to the NAIC Financial Analysis Handbook. Additionally, state insurance regulators actively monitor and stress test insurers' risk-based capital (RBC) figures to determine whether an insurer has enough capital to sustain catastrophic events, such as pandemics. The life RBC formula includes factors to establish minimum capital requirements to address deterioration of mortality and morbidity experience—including those from pandemics. The Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force maintains the RBC formula for life and health insurers.
On March 20, 2020, the NAIC held a virtual event on the impact of COVID-19 on state regulators, industry, and consumers. Video recordings from the event are available for viewing on the NAIC's Coronavirus Resource Center (under the NAIC Resources tab) or the NAIC News channel on YouTube.
At the NAIC's 2020 Fall Virtual Meeting, the CIPR hosted a special event on pandemics and business interruption insurance. A recording of the event, Pandemic Business Interruption Federal Insurance Mechanism - Learning from the Past, Thinking About the Future, is available.
Committees Active on This Topic
COVID-19 and Credit Watch List as an Economic Indicator (Journal of Insurance Regulation, 2022)
NAIC COVID-19 Report for 2020: Year in Review (Feb. 2021)
The COVID-19 pandemic and health insurance regulation (Journal of Insurance Regulation, 2021)
Expanding paid sick leave programs in the wake of COVID-19 (Journal of Insurance Regulation, 2020)
The impact of selected issues resulting from COVID-19 on agents and lessons for the future October 10, 2020 (Journal of Insurance Regulation, 2020)
Compendium of U.S. State Insurance Department Responses to the COVID-19 Pandemic (Sidley Austin, LLP, updated frequently)
COVID-19: The Good, the Bad, and the Ugly (Insurance Information Institute, Nov. 2020)
Feasibility Questions About Government-Sponsored Insurance for Business Interruption Losses from Pandemics (Journal of Insurance Regulation, September 2020)
A Report of the NAIC on the State Insurance Regulatory Response to COVID-19: Update 1 (Jan. 1, 2020 - May 31, 2020)
A Report of the NAIC on the State Insurance Regulatory Response to COVID-19: Update 2 (June 1, 2020 - Sept. 30, 2020)
CIPR Historical Report: Historical Context of NAIC Conversations Surrounding Disease Outbreaks: A retrospective from the NAIC Proceedings (NAIC CIPR Research Library, May 2020)
Lessons Learned from 2015 CIPR Symposium Applicable to COVID-19 (Jeff Czajkowski & Eric Nordman, April 2020)
NAIC Insurance Brief: COVID-19 and Insurance (April 2020)
Coronaviruses Report (U.S. Government Accountability Office, March 3, 2020)
CIPR Historical Report: Influenza Pandemic of 1918 and its Effect on Insurance (NAIC CIPR Research Library, Dec. 2019)
NAIC 2020 Fall National Meeting to Include Special Session on Business Interruption (in association with pandemics) (Nov. 2020)