Key Questions to Ask in Designing a 

Pandemic Risk Insurance Program

Presentation to the Federal Advisory Committee 

on Insurance 

Lloyd Dixon

September 29, 2020
Slide 2

Policy Objective: Establish a Risk Transfer 

Mechanism for Epidemic Infectious Disease 

• Such a mechanism will enable businesses to:

– Obtain loans at favorable rates

– Address liability risk

– Keep key personnel employed during shutdowns

• It will also serve larger social goals 

– Maintain payroll across workforce (not necessarily in a firm’s 

narrow self-interest)

– Dampen downward economic spiral
Slide 3

Two Approaches for Achieving This Objective

Government Assistance

• Payroll Protection 

Program (PPP)

• Liability shield with 

compensation for 

injured parties

Insurance Mechanism

• Business expense policies 

(including payroll)

• Liability policies

• Insurer policy underwriting and 

claim payment infrastructure
Slide 4

An Insurance Mechanism Has Both 

Benefits and Drawbacks

Benefits

• Sets benefits in advance

• Uses existing claims-paying 

infrastructure

• Leverages insurer expertise in 

risk mitigation

• Transfers some pandemic risk 

to the private sector
Slide 5

An Insurance Mechanism Has Both 

Benefits and Drawbacks

Benefits

• Sets benefits in advance

• Uses existing claims-paying 

infrastructure

• Leverages insurer expertise in 

risk mitigation

• Transfers some pandemic risk 

to the private sector

Drawbacks

• Amount of risk insurers willing 

to take on appears small

• Potentially low take-up

• Difficulty determining 

appropriate rates

• Coverage litigation
Slide 6

Here, We Examine Six Key Questions to Ask in 

Designing a Pandemic Risk Insurance Program

1. How much risk should the private sector bear?

2. How much protection should the program provide?

3. Should the government charge a premium for the risk it bears?

4. Should business be required to purchase coverage?

5. Should the program be bifurcated by firm size?

6. Should workers compensation and general liability be included?
Slide 7

1. How Much Risk Should the Private Sector Bear?

Policy objective: Move some risk to private sector 

and give insurers incentives to carefully 

underwrite and adjust claims

Proposals Private-Sector Risk

BCPP 

primary

No private-sector retention for 

primary program

PRIA

Insurers pay 5% of claims cost 

over a deductible up to cap 

(insurer exposure ~$50B)

Chubb 

SME 

program

Insurers pay 5–6% up to 

industry cap (insurer 

exposure increases from $30 

to $60B over 20 years)
Slide 8

1. How Much Risk Should the Private Sector Bear?

Policy objective: Move some risk to private sector 

and give insurers incentives to carefully 

underwrite and adjust claims

Considerations

• Insurer outlays modest in comparison to 

government outlays

• Skin in the game aligns insurer and government 

incentives in paying claims

• Trade off between larger private-sector role and 

insurer interest in participating in program

Proposals Private-Sector Risk

BCPP 

primary

No private-sector retention for 

primary program

PRIA

Insurers pay 5% of claims cost 

over a deductible up to cap 

(insurer exposure ~$50B)

Chubb 

SME 

program

Insurers pay 5–6% up to 

industry cap (insurer 

exposure increases from $30 

to $60B over 20 years)
Slide 9

2. How Much Protection Should Program Provide?

Policy objective: Provide protection that meaningfully 

reduces the risk

Proposals Mandatory Offer

BCPP 

primary

Up to 80% of business 

expense up to 3 months 

(primary option)

PRIA

Coverage on same terms 

and conditions as BI 

policy; program cap 

$750B

Chubb 

SME 

program

Up to 80% of business 

expense up to 3 months 

($20 million per month 

cap for large employers)
Slide 10

2. How Much Protection Should Program Provide?

Policy objective: Provide protection that meaningfully 

reduces the risk

Considerations

• Closures may last much longer than three months

• Pro-rating of claims payments once cap is reached 

magnifies uncertainty and generates policyholder 

dissatisfaction

• Option for how best to extend/augment benefits 

should be considered

Proposals Mandatory Offer

BCPP 

primary

Up to 80% of business 

expense up to 3 months 

(primary option)

PRIA

Coverage on same terms 

and conditions as BI 

policy; program cap 

$750B

Chubb 

SME 

program

Up to 80% of business 

expense up to 3 months 

($20 million per month 

cap for large employers)
Slide 11

3. Should Government Charge Premium

for Risk It Bears?

Policy objective: Impose program costs on those who 

benefit, reduce moral hazard, accumulate funds for 

future claims

Proposals Government Premium

BCPP 

primary

Pricing designed to 

ensure widespread takeup and reduce moral 

hazard

PRIA

No charge for federal 

share; insurers charge to 

cover their share 

Chubb 

SME 

program

No charge for federal 

share; insurers charge to 

cover their share 
Slide 12

3. Should Government Charge Premium

for Risk It Bears?

Policy objective: Impose program costs on those who 

benefit, reduce moral hazard, accumulate funds for 

future claims

Considerations

• Can’t expect businesses to pay for social goal of payroll 

replacement for all employees

• Government benefits from limited downward economic spiral and 

reduced tax base

• Premium revenue may cover costs of smaller regional events

• Meaningful premiums provide opportunity for rate reductions for 

risk mitigation programs

• Should consider premiums that result in rates that businesses are 

willing to pay 

Proposals Government Premium

BCPP 

primary

Pricing designed to 

ensure widespread takeup and reduce moral 

hazard

PRIA

No charge for federal 

share; insurers charge to 

cover their share 

Chubb 

SME 

program

No charge for federal 

share; insurers charge to 

cover their share 
Slide 13

4. Should Businesses Be Required 

to Purchase Coverage?

Policy objective: Widespread take-up of pandemic 

risk insurance Proposals Mandatory Purchase

BCPP 

primary

No, but opt-out required

PRIA

No

Chubb 

SME 

program

No, but strong opt-out 

required
Slide 14

4. Should Businesses Be Required 

to Purchase Coverage?

Policy objective: Widespread take-up of pandemic 

risk insurance

Considerations

• Mandatory purchase is not popular

• A strong opt-out might help, but is withholding 

government assistance politically credible?

• Solution to high take-up may be attractive prices 

with perhaps the help of lenders

• An education campaign may also help

• Must balance low premiums with government 

cost

Proposals Mandatory Purchase

BCPP 

primary

No, but opt-out required

PRIA

No

Chubb 

SME 

program

No, but strong opt-out 

required
Slide 15

5. Should Eligibility and Program Benefits 

Vary by Firm Size?

Policy objective: Target program benefits to firms that 

need them and take advantage of efficiencies to be 

gained by tailoring program to structure of market

Proposals

Variation in Program by 

Firm Size

BCPP 

primary

None

PRIA

None

Chubb

Separate programs for 

(1) firms with 

<500 employees and (2) 

firms with >= 500 

employees
Slide 16

5. Should Eligibility and Program Benefits 

Vary by Firm Size?

Policy objective: Target program benefits to firms that 

need them and take advantage of efficiencies to be 

gained by tailoring program to structure of market

Considerations

• Large disparity between number of small and 

midsize vs. larger firms makes separate 

approaches for adjusting claims attractive

• Larger firms have more risk-management options 

and may prefer to tailor their strategy

• Lower subsidies may be warranted for larger firms

Proposals

Variation in Program by 

Firm Size

BCPP 

primary

None

PRIA

None

Chubb

Separate programs for 

(1) firms with 

<500 employees and (2) 

firms with >= 500 

employees
Slide 17

6. Should Liability and Workers 

Compensation Coverage Be Included?

Policy objective: Make available types of insurance that 

businesses need to sustain economic activity and 

provide mechanism for compensating injured parties

Proposals

Liability or WC 

Covered?

BCPP 

primary No

PRIA No

Chubb No
Slide 18

6. Should Liability and Workers 

Compensation Coverage Be Included?

Policy objective: Make available types of insurance that 

businesses need to sustain economic activity and 

provide mechanism for compensating injured parties

Considerations

• Including these lines adds to program cost

• But program designers should not focus on one 

aspect of problem to exclusion of other important 

aspects

• Further work needed to understand implications 

of liability and workers comp exposure on firm 

business and risk mitigation behavior

Proposals

Liability or WC 

Covered?

BCPP 

primary No

PRIA No

Chubb No
Slide 19

Concluding Thoughts

• The answers to each of these questions can help guide the 

design of a risk transfer mechanism

• A number of proposals are being floated, and desirable 

features from each may be combined

• The debate over pandemic risk insurance provides an 

opportunity to better understand if and how insurance 

mechanism can remain an integral part of U.S. strategy to 

address many considerable risks we face