COVID-19: The Insurability of Pandemic 

Risk & Market Implications for the P/C 

Insurance Industry

Robert P. Hartwig, PhD, CPCU

Clinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ♦ University of South Carolina

Robert.Hartwig@moore.sc.edu ♦ 803.777.6782

Federal Advisory Committee on Insurance

COVID-19 Subcommittee

September 29, 2020
Outline 

 Pandemic Risk and (Un)Insurability

 Severity Issues

 Solvency-threatening magnitude of loss

 Correlation and Diversification Concerns

 Impact on insurer investments

 Impacts on lines of insurance other than business interruption

 The Systemic Nature of Pandemic Risk

 A (Very) Brief History of Pandemic Insurance 

 Reinsurance Market Issues

 Communicable disease exclusions

 The Role of Government

 Summary
Pandemic-Related Challenges to Insurability: Severity

 Potential losses can easily exceed the industry’s capital, surplus and 

premium resources by many orders of magnitude

 IMF estimates that the global economic cost of COVID-19 could reach $9 trillion

 Global pandemic-related economic losses over the next 30 years could potentially total 

$23.5 trillion

 In the United States alone, total business continuity losses are estimated at $1.1 trillion 

per month for businesses of all sizes

 For US small businesses (<100 employees), business continuity losses range from 

$52B to $431B/month—and up to $668B/mo. for businesses with up to 500 employees

 Only $4.5B in premium is written each month, on average, in relevant lines of insurance 

by all P/C insurers in the US

 Costs in individual states are high too. In Illinois, for example, business continuity 

losses for small businesses are estimated at $1.8B - $7.9B/month (vs. $160M premium)
Viral Outbreaks Are Not An Insurable Risk

*Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD

For Reference

2005 Katrina

$58 Billion

2001 9/11

$48 Billion

(insured 

losses)

Pandemics 

are frequent, 

severe, and 

widespread 

(7 pandemics 

with multibillion$ 

economic

losses in just 

the last 18 

years)

Economic Losses from Pandemics
Estimated Monthly U.S. Business Interruption Coronavirus Losses 

for Small Business—Potential Range (<100 Employees; $Bill)

Source: APCIA, April 2020.

$52 

$223 $255 

$431 

$0

$100

$200

$300

$400

$500

Small Business w/ BI - Low Small Business w/ BI - High All Small Businesses - Low All Small Businesses - High

The potential for such losses for all 

businesses of all sizes is currently 

estimated at $1 - $1.1 trillion per month.

* Businesses impacted: Proportion of businesses completely or substantially closed related to coronavirus

Assumptions: Losses if standard insurance policy exclusions for viruses/pandemics are voided and physical loss/damage 

requirement is stricken; three main coverages - profit lost, payroll/benefits, additional expenses; average annual $2m 

revenue and 7% profit margin; non-wage benefits of small businesses are 25% less than that for average US businesses

60% Businesses impacted*

10% of Payroll for additional expenses

33.3% Have BI coverage

50% Have BI payroll/benefits coverage

90% Businesses impacted*

30% of Payroll for additional expenses

60% Have BI coverage

80% Have BI payroll/benefits coverage

60% Businesses Impacted*

10% of Payroll for additional 

expenses

90% Businesses impacted*

30% of Payroll for additional 

expenses

Monthly BI losses for small business 

vary widely depending on underlying 

assumptions but expansive legislation 

would result in higher estimates; For 

all businesses <500 employees, BI 

losses range between $393B - $668B
Pandemic-Related Challenges to Insurability: Data Issues

 Frequency and severity of loss cannot be precisely modeled because of a 

lack of historical data

 Pandemics have occurred throughout recorded history

 But massive government ordered shutdowns ordered in response to the pandemic are 

unprecedented

 The lack of precedent for the shutdowns and the fact that their timing, duration and 

breadth result from the uncoordinated decisions of thousands of government officials 

renders them impossible to model
Government Mandated Business Closures Were the Real 

Black Swan, Not the Coronavirus

Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina

• The US (and world) has endured several 

other major infectious disease outbreaks 

killing 100,000+ Americans without shutting 

down the economy

• Hong Kong Flu (1968-70)

• Asian Flu (1957-58)

• It is the reaction to the virus that is unprecedented 

and represents the true Black Swan event

• Government-ordered shutdowns were 

unforeseeable and cannot be accurately modeled 

for insurance purposes
Pandemic-Related Challenges to Insurability: Correlations

 Large-scale business income-related pandemic losses are correlated with 

both financial market losses and other insurance losses, impairing the ability 

to mitigate pandemic-related losses through diversification

 Global stock markets crashed as the coronavirus spread and countries locked down

 The S&P 500 lost 34% of its value in just over a month (Feb.- March)

 US stock market indices have experienced their largest point declines in history and 

some the largest declines in percent terms as well

 Emergency measures by the Fed (rate cuts, QE) have caused many interest rates to 

plunge to their lowest levels in the post-WW II era

 P/C insurer portfolio yields are falling and will remain depressed for years

 The Fed has indicated it plans to keep rates low for years (e.g., at least 2023) 

 P/C industry surplus sustained a $75B decline (9%) in Q1 2020 amid market volatility
Top 10 Largest Daily Point Drops in 

S&P 500 History*

Source: Standard & Poor’s; USC Center for Risk and Uncertainty Management.

Point 

Change

-131.1

-113.2 -111.9 -109.7

-140.9 -137.6

-188.0

-225.8

-260.7

-350 -324.9

-300

-250

-200

-150

-100

-50

0

3/16/20203/12/2020

3/9/2020

6/11/20203/11/20202/27/20203/18/2020

2/5/2008

2/24/2020

9/3/2020

*Index began in 1923.

9 of the 10 largest point declines 

ever on the S&P 500 have occurred 

since the start of the pandemic; 

Period includes 3 of the top 20 

declines in percent terms

-11.98% 

decline  3rd

largest ever

-9.51% 

decline  6th

largest ever

-7.60% 

decline 19th

largest ever

The S&P 500 plunged 

34% from its Feb. 19 peak 

and March 23 trough
10

Policyholder Surplus (Capacity), 

2006:Q4–2020:Q1

Sources: ISO, A.M .Best; Risk and Uncertainty 

Management Center, University of South Carolina.

($ Billions) $487.1 $496.6

$512.8

$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7

$530.5

$544.8

$559.2$559.1

$538.6

$550.3

$567.8

$583.5

$586.9

$607.7

$614.0

$624.4

$653.4

$671.6

$673.9

$675.2

$674.2$673.7

$676.3

$700.9

$717.0

$750.7

$781.5

$742.1

$779.5

$802.2

$812.2

$847.8

$771.6

$662.0

$566.5

$570.7

$505.0

$517.9

$515.6

$400

$450

$500

$550

$600

$650

$700

$750

$800

$850

$900

06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q113:Q213:Q313:Q414:Q114:Q214:Q314:Q415:Q215:Q416:Q116:Q417:Q217:Q418:Q318:Q419:Q119:Q219:Q319:Q420:Q1

Financial 

Crisis 

(-16.2%)

2010:Q1 data includes $22.5B of paid-in 

capital from a holding company parent 

for one insurer’s investment in a noninsurance business. 

Drop due to near-record 

2011 CAT losses 

(-4.9%)

Policyholder Surplus is the industry’s 

financial cushion against large insured 

events, periods of economic stress and 

financial market volatility. It is also a 

source of capital to underwrite new risks.

The COVID-19 pandemic pushed 

down asset prices, resulting in a 

9%--a decline of ~$75B 
US Treasury Security Yields:

A Long Downward Trend, 1990–2020*

*Monthly, constant maturity, nominal rates, through Sept. 2020. Sept. 2020 figure is as of 9/13/20.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research 

(recession dates); Risk and Uncertainty Management Center, University of South Carolina.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20

Recession

2-Yr Yield

10-Yr Yield

Yields on 10-Year US Treasury 

Notes have been essentially 

below 5% for more than a 

decade 

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, 

most P/C insurer portfolios will have low-yielding bonds for many years to come. 

Fed emergency rate cuts 

and QE in response to the 

COVID-19 pandemic and 

market volatility have 

pushed rates to their levels 

below those in the 

financial crisis

10-YR. TREASURY

Jan. 2020: 1.76%

Sept. 2020: 0.69%*
Net Investment Yield on Property/Casualty 

Insurance Invested Assets, 2007–2020F*

4.4

4.0

4.6 4.5

3.7 3.8

3.7

3.4

3.7

3.2 3.1 3.1

3.4

3.1 3.0

4.6

4.2

3.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F

The yield on invested assets are at their 

lowest level in many decades

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent) COVID-19 Fed rate cuts, bond purchases 

(QE), policy shifts and a weak global 

economy will continue to exert downward 

pressure on portfolio yields. Could revisit 

the 1961 record low of 2.8% in 2021.

Average: 1960-2018 = 5.0%

Low: 2.8% (1961)

High: 8.2% (1984/85)
Potential Impacts of COVID-19 on LOSSES in 2020, by Key Line

Line Estimated Loss Impact

Workers Compensation $0.2B - $92B (depends on severity of pandemic 

and “presumption” determination)

Business Interruption & 

Contingency

$2B - $22B (US)

General Liability* $0.7B to $27B loss across US & Bermuda markets

Mortgage $0 - $1.7B loss across US & Bermuda markets

D&O $0.6 - $4.0 loss across US & Bermuda markets

*Includes nursing home professional liability.

Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. 

and other sources; Risk and Uncertainty Management Center, University of South Carolina.

While BI and WC exposures loom large, many other lines are potentially 

impacted as well. This illustrates the correlation between pandemics, 

underwriting losses and adverse impacts on investments 
Pandemic-Related Challenges to Insurability: Assessment

 Insurability traditionally rests upon 6 criteria:

 A risk must consist of a large number of exposure units so that the losses of the few can 

be distributed across the entire population of policyholders.

 Losses must be accidental/random and unintentional in nature (i.e., fortuitous).

 Losses must be determinable and measurable, enabling accurate and timely 

adjustment.

 Losses cannot be exceedingly catastrophic or financially ruinous to the risk pool as a 

whole.

 The probability of loss must be calculable, necessary for the proper modeling and 

pricing of risk.

 The premium charged by insurers to transfer the risk of loss must be economically 

affordable.
Figure 1. Pandemic - An Insurable Risk?

Requirements of an 

Insurable Risk

Requirement Met? Yes/No

1. Large number of 

exposure units

No. While millions of individual businesses suffered business continuity losses arising from the COVID-19 

pandemic, the pandemic’s effects were global in scale and nearly simultaneous in scope, effectively reducing the 

number of exposure units to one—the business sector collectively.

2. Accidental/Random 

and unintentional loss

No. Pandemics are natural phenomena but the decisions by thousands of policymakers at all levels of government 

to close millions of businesses and restrict the movement of people was intentional.

3. Determinable and 

measurable loss

No. For insurers to determine losses, the scale and scope of losses for any given risk must be estimable. 

Business continuity losses from COVID-19, estimates for which remain highly uncertain and range into the trillions 

of dollars, are indeterminable due to their dependence on decisions made by thousands of policymakers at all 

levels of government, the pace at which consumers and businesses reengage in the economy and epidemiological 

developments. 

4. No (ruinous) 

catastrophic loss

No. Unlike traditional catastrophe risks, pandemics by definition threaten all or most or the members of the risk 

pool simultaneously. The rapid aggregation of losses is destabilizing and potentially ruinous, threatening the 

solvency of individual insurers and the industry as a whole. 

5. Calculable chance of 

loss

No. Pandemics have occurred throughout history but the policy response to COVID-19 is without precedent. 

Insurers traditionally rely on historical loss information and trends to estimate the frequency and severity (cost) for 

risks they insure. No such historical data exists for the policy response associated with the COVID-19 pandemic, 

hence premiums cannot be determined.

6. Economically feasible 

premium

No. Because pandemics by definition threaten all or most or the members of the risk pool simultaneously, the 

probability of loss is close to certainty. The high probability of loss combined with high claim severities necessarily 

lead to premiums that can approach or even exceed the cost of the claim itself.
A (Very) Brief History of Pandemic Insurance 

 Very little insurance for “pure” pandemic risk has ever been brought to 

market by (re)insurers due largely to insurmountable insurability issues

 PathogenRX is arguably the best-known recent example of a P/C insurance 

product designed to address pure pandemic risk. Marketed by the global 

commercial insurance broker Marsh LLC, PathogenRX was jointly developed by 

Munich Re, one of the world’s largest reinsurers, and Metabiotica, a start-up 

focused on helping governments and industry estimate, mitigate and manage 

epidemic risk. PathogenRX was introduced in 2018, approximately 18 months 

before the first confirmed cases of COVID-19 were reported. Only one policy was 

ever sold in the pre-COVID era

 World Bank Pandemic Emergency Financing Facility (PEF) was essentially a 

catastrophe bond with multiple parametric triggers. The PEF was heavily criticized 

for being slow to pay and for being too generous to investors. Plans for a PEF 2.0 

were abandoned.
A (Very) Brief History of Pandemic Insurance 

 Limited pandemic risk exposure exists in a variety of other lines, most of it 

incidental:

 Event cancellation (e.g., Wimbledon policy)

 Workers compensation

 Travel

 Directors and officers

 Mortgage guaranty

 Trade credit

 Employment practices liability

 General liability

 Medical professional liability
Additional Challenges to Insurability: Systemic Risk

 Pandemic risk is by its nature systemic

 The destabilizing impacts of pandemic risk extend throughout the entire economy

 Such risks cannot be diversified away through private insurance markets

 The magnitude of COVID-19 losses is so large that any meaningful commitment of 

capital would be solvency-threatening to insurers

 Only governments—which uniquely possess both taxing and borrowing authority—can 

manage such risks

 Litigation and legislation that would seek to compel insurers to pay trillions in business 

continuity claims is solvency threatening to insurers, given and industry capital base of 

approximately $800 billion

 P/C insurers currently underwrite and estimate $100 trillion in potential loss exposure in 

the US (equal to 4.5 times GDP)

 Implication: Events that threaten the solvency of the P/C insurance industry threaten to 

amplify the multi-trillion dollar systemic shocks already roiling the US economy.
Additional Challenges to Insurability: Reinsurance 

Availability

 Reinsurance markets also view large-scale pandemic risk as uninsurable

 This has resulted in the adoption of near-absolute communicable disease 

exclusions in most property and increasingly casualty reinsurance treaties

 Primary insurers, in order to maintain consistency between the coverage 

they offer and the reinsurance available, must file similar exclusions

 Many of those filings are not being approved by regulators

 Regulator rejection of CD exclusions combined with widespread reinsurer 

adoption of CD exclusions threatens to compromise the relationship between 

insurers and reinsurers that is critical to maintaining market stability
Major and Rapid Changes in the Reinsurance Markets 

 Property: COVID-19 and Concerns Over BI Are Driving Reinsurers to Exclude 

Communicable Disease (CD) Globally in Virtually All Property Treaties

 Primary insurers are running into DOI resistance to gain approvals for exclusions

 Commercial and personal lines

 Exclusion is all CDs, not just pandemic or epidemic

 Casualty: Some Reinsurers Starting to Exclude CD

 Exclusions being driven by London market

– GL, WC (esp. WC CAT)

 No universal exclusion push in non-London markets (yet)

 Not affecting financial lines yet (D&O, E&O, Fiduciary, Fidelity) or Cyber

 Reinsurers Try to Manage Global Aggregation Risk
Additional Challenges to Insurability: Reinsurance Availability

 Adoption of CD exclusions in reinsurance treaties leaves primary insurers 

with only three options:

1. file for parallel communicable exclusions with state insurance regulators

2. non-renew policies in their entirety—leaving policyholders with no coverage at all

3. allow potential exposure to communicable disease, which may not be reinsured, to 

accumulate on their balance sheets, threatening the insurers’ stability and solvency, 

and necessitating rate adjustments to account for the risk (that could similarly leave 

most policyholders with no coverage).

 Of these 3 options, seeking regulatory approval for CD exclusions is 

indisputably the least disruptive, with policies renewing seamlessly 

 Allowing insurers to align their policies with available reinsurance is 

essential to maintaining coverage availability, affordability and insurer 

solvency in the marketplace
A Role for Government 

 Economic losses from large-scale pandemics exceed the claims paying 

capability of global insurance markets

 Private insurer involvement in this market has historically been very limited

 Losses of such a magnitude require the involvement of government, which 

uniquely possesses the authority to both borrow and tax, allowing the 

economic losses from pandemics to be spread (diversified) over time

 There are numerous potential approaches to government involvement the 

management of pandemic risk

 Insurers can play a supporting role

 Insurers can develop products/services to help manage certain risks on a limited scale, 

but those efforts will always be limited by the limits to insurability
Summary

 Business continuity losses arising from widespread viral risks represent an 

uninsurable risk for the private property casualty insurance industry.

 The magnitude of potential losses exceeds the claims paying resources of the 

industry while a lack of historical data impairs the ability of insurers to precisely 

model the frequency and severity of losses and determine premiums.

 Large-scale pandemic risk fails to meet any of the traditional criteria for insurability

 The experience of COVID-19 suggests that apart from highly specialized, niche 

products, it is unlikely that broad coverage for pandemic risks can be provided to 

the mass market by private insurers

 Any solution involving the financing of large-scale pandemic-driven economic 

losses will necessarily require widespread government protection, which could, in 

turn, encourage increased innovation of specialized products by private insurers 

and reinsurers. 
Thank you for your time

and your attention! 

Twitter: twitter.com/bob_hartwig

For a copy of this presentation, email 

me at robert.hartwig@moore.sc.edu or 

Download at www.uscriskcenter.com

24

For additional details, see three recently co-authored papers: Uninsurability of Mass Market Business 

Continuity Risks from Viral Pandemics; Communicable Disease Exclusions: Maintaining Stability in 

Property Casualty Insurance Markets Amid a Global Pandemic, and Insurance for Economic Losses 

Caused by Pandemics. All are available at www.uscriskcenter.com.