LLOYD DIXON, JAMIE MORIKAWA

Improving the 

Availability and 

Affordability of 

Pandemic Risk 

Insurance

Projected Performance of Proposed Programs

C O R P O R A T I O N
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iii

About This Report

Given the closures and other restrictions on business activity during the COVID-19 

pandemic, stakeholders have developed several proposals for an insurance-based program to provide businesses with the resources needed to maintain payroll and benefits 

and to cover the ongoing operating expenses necessary to survive. This report describes 

the distinguishing features of the most-visible proposals and develops a quantitative 

model that shows their potential consequences. Proposed programs are evaluated in 

terms of the proportion of revenue decline replaced (efficacy), efficiency, affordability, 

the risk borne by commercial insurers, expected annual government net outlays, and 

the amount of subsidy provided to policyholders. The analysis should be useful to 

members of Congress, congressional staff, insurers, and policyholders as they consider 

whether to support the creation of a pandemic risk insurance program and how such a 

program can be best designed.

The RAND Kenneth R. Feinberg Center for Catastrophic Risk 

Management and Compensation

The Feinberg Center seeks to identify and promote laws, programs, and institutions 

that reduce the adverse social and economic effects of natural and manmade catastrophes by improving incentives to reduce future losses; providing just compensation 

to those suffering losses while appropriately allocating liability to responsible parties; 

helping affected individuals, businesses, and communities to recover quickly; and 

avoiding unnecessary legal, administrative, and other transaction costs. 

Questions or comments about this report should be sent to the project leader, 

Lloyd Dixon (dixon@rand.org). For more information about the Feinberg Center, see 

www.rand.org/ccrmc or contact the director at ccrmc@rand.org.

Funding

Funding for this research was provided by the generous contributions of the RAND 

Kenneth R. Feinberg Center for Catastrophic Risk Management and Compensa-
iv Improving the Availability and Affordability of Pandemic Risk Insurance

tion Advisory Board and, in part, by a contribution to the center by the American 

Property Casualty Insurance Association. 

Acknowledgments

This report was improved by comments, information, and expertise provided by many 

people. We would like to thank staff at the American Property Casualty Insurance 

Association for directing us to useful data sources, discussing assumptions they have 

used in projecting the impacts of their proposed Business Continuity Protection Program, and providing insurance industry financial statistics. The Reinsurance Association of America provided helpful information on modeling approaches and data. 

Chubb provided insight into the structure and modeling of its proposed program. 

Charles Landgraf at Arnold and Porter helped us better understand and describe the 

Business Continuity Coalition proposal. Davide Priebe at Guy Carpenter provided 

valuable insights into the strengths and weakness of different approaches.

Constructive peer reviews of the draft report were provided by Michael Dworsky 

at the RAND Corporation and Jason Schupp at the Center for Better Insurance. Very 

helpful comments were also provided by AIG, Liberty Mutual, State Farm, and Travelers. Paul Steinberg at RAND improved the flow and clarity of the exposition, and 

Rebecca Fowler skillfully edited the document. 
v

Contents

About This Report ................................................................................... iii

Figures and Tables ................................................................................... vii

Summary .............................................................................................. ix

Abbreviations ....................................................................................... xvii

CHAPTER ONE

Introduction ........................................................................................... 1

Research Questions and Study Approach .......................................................... 2

Report Organization ................................................................................... 3

CHAPTER TWO

Overview of Proposed Programs................................................................... 5

Proposal 1: Business Continuity Protection Program ............................................. 5

Proposal 2: Chubb Pandemic Business Interruption Program.................................... 7

Proposal 3: Zurich Preliminary Pandemic Proposal .............................................. 12

Proposal 4: Pandemic Risk Insurance Act ......................................................... 13

Proposal 5: Business Continuity Coalition Program ............................................. 14

Discussion .............................................................................................. 15

CHAPTER THREE

Modeling Approach and Base-Case Parameters ............................................... 19

Modeling Approach ................................................................................... 19

Base-Case Parameter Values ........................................................................ 27

Limitations ............................................................................................ 41

CHAPTER FOUR

Projected Program Performance in the Base Case ........................................... 43

Affordability .......................................................................................... 43

Efficacy ................................................................................................ 48

Efficiency .............................................................................................. 48

Risk Borne by Commercial Insurers ................................................................ 51
vi Improving the Availability and Affordability of Pandemic Risk Insurance

Expected Annual Government Outlays ............................................................ 52

Policyholder Subsidy .................................................................................. 53

Discussion ............................................................................................. 56

CHAPTER FIVE

Sensitivity of Projections to Changes in Parameter Values .................................. 59

Approach ............................................................................................... 59

Sensitivity of Results to Changes in Return Period Used by Insurers in Pricing ............. 60

Sensitivity of Results to Changes in Other Parameters ........................................... 63

Sensitivity of Results to Change in Assumption on Whether Government Pays Loss 

Adjustment Expenses ........................................................................... 64

CHAPTER SIX

Conclusion ........................................................................................... 69

APPENDIXES

A. Overview of Business Interruption Policies ................................................. 71

B. Insurance Payments in a Partial Shutdown ................................................. 73

C. Pandemic Risk Insurance Model .............................................................. 75

D. General and Selling Expense and Loss Adjustment Expense Ratios by Line of 

Business ........................................................................................... 81

References ............................................................................................ 85
vii

Figures and Tables

Figures

 S.1. Annual Premium in Base-Case Projection ............................................ xii

 S.2. Take-Up Rate in Base-Case Projection ............................................... xiii

 S.3. Expected Annual Government Net Outlays at Base-Case Parameter Values ... xiv

 S.4. Annual Premium When Insurers Use 30-Year Return Period in Setting 

Prices and Other Parameters Remain at Base-Case Values ......................... xv

 3.1. Model Overview ........................................................................ 20

 4.1. Program Efficiency for Small and Medium-Sized Firms at Base-Case 

Parameter Values ........................................................................ 50

 4.2. Program Efficiency for Large Firms at Base-Case Parameter Values ............. 50

 4.3. Expected Annual Government Net Outlays per Participating Firm for 

Small and Medium-Sized Firms at Base-Case Parameter Values .................. 52

 4.4. Expected Annual Government Net Outlays for Small and Medium-Sized 

Firms at Base-Case Parameter Values ................................................. 53

 4.5. Expected Annual Government Net Outlays per Participating Firm for 

Large Firms at Base-Case Parameter Values ......................................... 54

 4.6. Expected Annual Government Net Outlays for Large Firms at Base-Case 

Parameter Values ........................................................................ 54

 4.7. Expected Annual Government Net Outlays for All Firms at Base-Case 

Parameter Values ......................................................................... 55

 4.8. Policyholder Subsidy for Small Firms ................................................. 55

 4.9. Policyholder Subsidy for Large Firms ................................................ 56

 5.1. Premium for Small and Medium-Sized Firms as Pandemic Return Period 

Used by Insurers Varies ................................................................. 61

 5.2. Premium for Large Firms as Pandemic Return Period Used by Insurers 

Varies ...................................................................................... 62

 5.3. Take-Up Rate as Return Period Used by Insurers Varies ........................... 62

 5.4. Capital Help by Insurers as Return Period Used by Insurers Varies ............... 63

 5.5. Expected Annual Government Net Outlays for All Firms as the Return 

Period Used by Insurers Varies ........................................................ 64
viii Improving the Availability and Affordability of Pandemic Risk Insurance

Tables

 S.1. Ranking of Modeled Programs by Program Metric at Base-Case Parameter 

Values...................................................................................... xi

 2.1. Features of Proposed Pandemic Risk Insurance Programs .......................... 8

 3.1. Model Inputs ............................................................................. 21

 3.2. Model Outputs .......................................................................... 23

 3.3. Measures Used to Evaluate Program Performance ................................. 26

 3.4. Distribution of Firms in the United States with Employees by Firm Size in 

2017 ...................................................................................... 28

 3.5. Base-Case Parameter Values for Modeled Programs ............................... 30

 3.6. Major Contagious Disease Incidents Since 1918 ..................................... 37

 4.1. Program Performance at Base-Case Parameter Values ............................. 44

 4.2. Ranking of Modeled Programs by Program Metric at Base-Case Parameter 

Values...................................................................................... 57

 5.1. Range of Parameter Values Used in Sensitivity Analysis ............................ 59

 5.2. Sensitivity of Program Outcomes to Changes in Parameter Values ............... 65

 5.3. Sensitivity of Program Outcomes to Change in Assumption on Whether 

Government Pays Loss Adjustment Expenses ........................................ 67

 C.1. Parameter Definitions ................................................................... 75

 D.1. General and Selling Expense Ratio by Line of Business Between 2015 and 

2019 ....................................................................................... 81

 D.2. Loss Adjustment Expense Ratio by Line of Business Between 2015 and 2019 ... 83
ix

Summary

The COVID-19 pandemic led to a substantial drop in U.S. economic activity in 2020. 

Government stay-at-home orders, restrictions on business activities, and consumer concerns about potential exposure to the virus caused unemployment rates to rise and put 

many businesses in financial jeopardy. Businesses often purchase business interruption 

coverage that covers loss of revenue due to fires and other perils, but policies typically 

require that the interruption be due to physical damage at the insured property, and, 

in recent years, the policies have excluded loss due to contagious diseases. As a result, 

insurers have held that in most cases they are not obligated to cover the enormous business interruption losses caused by COVID-19.

Now, insurers, insurance industry trade groups, policyholder groups, and Congress have developed proposals that would enhance the role that insurance plays in 

providing businesses with the resources they need to maintain payroll and benefits and 

cover ongoing operating expenses during an outbreak. The most visible proposals are 

the following: 

• The Business Continuity Protection Program (BCPP)—proposed by the 

American Property Casualty Insurance Association, the National Association of 

Mutual Insurance Companies, and the Independent Insurance Agents and Brokers of America—provides payroll, benefits, and expense support to the private 

sector in the event of a declared public health emergency.

• Chubb’s Pandemic Business Interruption Program has two parts: the Pandemic Business Expense Insurance Program, which is open to small and 

medium-sized firms (firms with 500 or fewer employees), and the Pandemic 

Business Interruption Reinsurance program (Pandemic Re), which is open to 

firms with more than 500 employees.

• The Zurich Preliminary Pandemic Proposal proposes a flexible program that 

allows insurers to choose how much risk to bear.

• The Pandemic Risk Insurance Act of 2020 (PRIA), introduced by Representative Carolyn Maloney in May 2020, seeks to establish a Pandemic Risk Reinsurance Program modeled on the federal Terrorism Risk Insurance Program.

• The Business Continuity Coalition (BCC) proposal would make coverage for 

pandemic-related losses available in a broader range of insurance policies than 
x Improving the Availability and Affordability of Pandemic Risk Insurance

other proposals. The BCC is composed of insurance policyholders from across 

the U.S. economy.

Objectives and Approach

This report seeks to inform the discussion of the benefits and drawbacks of the five 

proposals for expanding insurance for revenue declines due to pandemic-induced business closures or restrictions on economic activity by addressing the following research 

questions:

• What are the distinguishing features of the most visible proposals for a pandemic 

risk insurance program?

• How will these programs perform in terms of specific key dimensions: efficacy, 

efficiency, affordability, risk borne by commercial insurers, government net outlays, and the extent of policyholder subsidies?

To address these questions, we first identified the most-visible proposals and 

compared their key features. We then developed a high-level, quantitative model to 

project the key outcomes for each of the proposals. The model is based on a number 

of underlying parameters, and we reviewed economic and insurance literature and 

data to develop reasonable values for each. We also consulted with experts about what 

values would be reasonable. The model uses several simplifying assumptions for each 

program. In some cases, these assumptions were necessary because the program proposal is silent on the particular issue. In others, we made assumptions to simplify 

comparisons across programs. For example, the coverages provided by many of the 

proposals are similar but not identical. We standardized the coverage to allow use of a 

demand function that enables us to compare take-up rates across programs. Thus, we 

project outcomes for insurance programs that are similar, but not identical, to those 

proposed. Harmonizing some aspects of the proposals allows us to better highlight 

the strengths and weaknesses of the different approaches. For this study, we modeled 

programs motivated by the BCPP, Chubb, and PRIA programs. The results of these 

models give insights into the performance of the Zurich and BCC programs, which 

we did not separately model. For each modeled program, we projected outcomes in a 

base case and then examined the sensitivity of the results to variation of the underlying 

parameters over plausible ranges. The modeled programs were evaluated in terms of 

efficacy, efficiency, affordability, risk borne by commercial insurers, expected annual 

government net outlays, and policyholder subsidy.
Summary xi

Results

The relative performance of the modeled programs under the base-case parameter 

assumptions is summarized in Table S.1. In the base case, insurers use a five-year pandemic return period in pricing the risk that they bear. Such a return period would be 

most relevant in the first years after an insurance program is signed into law, and the 

law applies to losses due to COVID-19 and its variants. 

For small and medium-sized firms, the BCPP approach performs best in terms 

of affordability, efficacy, and efficiency. The PRIA approach does the best in terms of 

expected annual net government outlays and policyholder subsidy. It also does best in 

terms of risk borne by commercial insurers, assuming that best in this context means 

the most risk borne by commercial insurers. For large firms, the BCPP approach again 

performs best in terms of affordability, efficacy, and efficiency. The PRIA approach 

still transfers the most risk to commercial insurers, but the Chubb approach now generates the lowest expected annual government net outlays and policyholder subsidy. A 

summary of the findings on each metric follows.

Affordability

The greater efficiency of the BCPP approach and the ability of the government to 

spread risk over a longer period than the private sector can results in the BCPP’s lower 

premium (Figure S.1). Although the $442 premium projected for small and mediumsized firms in the BCPP approach seems modest, it remains to be seen whether 65 percent of firms would buy coverage at this rate, as assumed in the base case. Very rough 

calculations suggest that premiums at this level could increase the cost of commercial 

multiple peril policies on the order of 4.4 to 8.8 percent. Some firms may be reluctant 

Table S.1

Ranking of Modeled Programs by Program Metric at Base-Case Parameter Values

Program Metric

Small and Medium-Sized Firms Large Firms

BCPP 

Approach

Chubb 

Approach

PRIA 

Approach

BCPP 

Approach

Chubb 

Approach

PRIA 

Approach

Affordability Most Mid Least Most Least Mid

Efficacy Highest Mid Lowest Highest Lowest Mid

Efficiency Highest Mid Lowest Highest Mid Lowest

Risk borne by commercial 

insurers

Least Mid Most Least Mid Most

Expected annual net 

government outlays

Highest Mid Lowest Highest Lowest Mid

Policyholder subsidy Most Mid Least Most Least Mid

NOTE: Shading indicates the program that performs best on the metric.
xii Improving the Availability and Affordability of Pandemic Risk Insurance

to purchase coverage at these rates, remembering the large government-funded Paycheck Protection Program (PPP) in the current pandemic. 

The premiums for large firms are comparable to those for small firms in the 

BCPP and PRIA approaches when normalized by payroll (premium per $1,000 payroll). Due to the market-based rate charged for the risk borne by the government, the 

premium charged by Chubb’s Pandemic Re is projected to be much higher ($6.86 million per firm) than in the other two approaches. 

Efficacy

None of the programs does a particularly good job in terms of the percentage of losses 

reimbursed over a 12-month pandemic (efficacy). This is largely because of the moderate to low take-up rates and the 20 percent policyholder co-pay (Figure S.2). The BCPP 

approach does best because its lower premium results in the highest take-up rate. Takeup and the percentage of losses reimbursed for the large firms in Chubb’s Pandemic Re 

approach are particularly low. Large firms presumably have a better ability to weather 

revenue declines than smaller firms, but the fact remains that they account for 60 percent of payroll at firms with employees, and their financial health will have important 

consequences for overall employment levels during a pandemic.

Efficiency

Program efficiency is the ratio of claim payment to overall program costs and driven 

by general and selling expenses, loss adjustment expenses, and private-sector capital 

Figure S.1

Annual Premium in Base-Case Projection

0.16 

0.70 

6.86 

442 

1,060 

1,630

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Small and medium-sized firms Large firms

0

1

2

3

4

5

6

7

8

BCPP

Chubb

PRIA

Annual premium, large firms ($ millions)

Annual premium, small and medium-sized firms ($)
Summary xiii

costs. BCPP does best on this metric partly because it relies on parametric policies 

to reduce costs and to address the practical problem of simultaneously adjusting an 

enormous number of claims.1 BCPP also fares best in part because it does not require 

insurers to hold capital to protect against solvency risk. The cost of such capital is the 

cost of transferring risk from the public to commercial insurers. Higher capital costs 

reduce efficiency but are associated with lower government outlays should an event 

occur and with other potential benefits that come with greater private-sector skin in 

the game. These other potential benefits include greater attention to fraudulent claims, 

as well as the development of the expertise and experience needed to grow the private 

sector’s ability to write pandemic risk. When deciding whether to proceed with a pandemic risk insurance program, program efficiency should be compared with that of 

other approaches, such as the PPP. We found that the efficiency of the BCPP approach 

compares favorably to the administrative costs of the PPP, but unless pandemic return 

periods are short, efficiencies of the other program do not compare so favorably. 

1 Payment by a parametric insurance policy is triggered by a metric or index that is easy to determine rather 

than property damage or other loss suffered by the insured. In the context of pandemic risk insurance, payment 

would be triggered following a government declaration of a public health emergency and restricted to firms in the 

geographic area and industries identified in the closure order. Such a parametric trigger would avoid the need for 

the traditional claims adjustment process associated with indemnity policies. 

Figure S.2 

Take-Up Rate in Base-Case Projection

65 65

42

10

32 32

Take-up rate (%)

BCPP

Chubb

PRIA

Small and medium-sized firms Large firms

10

20

30

40

50

60

70

75

0
xiv Improving the Availability and Affordability of Pandemic Risk Insurance

Risk Borne by Commercial Insurers

The amount of risk borne by commercial insurers is highest in PRIA, but, reflecting 

the difficulty of insuring pandemic risk, it is not particularly high in any of the programs. Chubb proposes that the insurer risk share double over time, but even so, it will 

remain modest. One advantage of the insurer deductible in the PRIA approach is that 

the share of losses borne by insurers would be higher in smaller or better-contained 

pandemics. The capital insurers’ need to hedge solvency risk is not large relative to 

industry surplus for the Chubb and PRIA approaches (3.8 percent of an estimated 

$325 billion for commercial lines), but further analysis is required to determine how 

difficult it would be for the industry to raise this amount of capital.

Expected Annual Government Net Outlays and Policyholder Subsidy

Illustrating the usual trade-off between affordability and government cost, the BCPP 

approach does best on affordability but worst on expected government annual net 

outlays and policyholder subsidy. Expected annual government net outlays depend on 

what the pandemic return period (as opposed to the return period used by insurers in 

setting premiums) turns out to be. There is a great deal of uncertainty regarding this 

return period, and Figure S.3 plots expected annual government net outlays for different return periods. As can be seen, expected annual net outlays are lowest for the 

Figure S.3 

Expected Annual Government Net Outlays at Base-Case Parameter Values

–50

0

50

100

150

200

250

Expected annual government outlays ($ billions)

BCPP

Chubb

PRIA

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)
Summary xv

Chubb approach, with government generating a surplus in the base case if the return 

period turns out to be approximately ten years longer than the five-year return period 

insurers use in setting premiums. 

Our measure of government net outlays is only the direct revenues and outlays 

of the program. Indirect costs, such as an increased demand for government assistance 

during an event when there is limited insurance coverage, should also be considered 

when assessing the full effect of a pandemic insurance program on overall government 

outlays. Such an analysis was beyond the scope of this study, but the amount of risk 

borne by commercial insurers is likely a better indicator of overall net government outlays than direct government outlays through the pandemic insurance program.

Projected outcomes are sensitive to several underlying model parameters about 

which there is considerable uncertainly. In particular, the pandemic return period that 

insurers use in pricing coverage has an important impact on expected premium and 

take-up in the Chubb and PRIA approaches. If the proposed programs do not apply 

to COVID-19 and its variants, a longer return period than the five years used in the 

base case might be a more accurate expectation of insurer behavior. When the return 

period used by insurers in setting prices is 30 years, the projected premiums for small 

and medium-sized firms is similar in all three programs (Figure S.4). The premium 

for large firms remains substantially higher in the Chubb approach than in the other 

two approaches.

Figure S.4 

Annual Premium When Insurers Use 30-Year Return Period in Setting Prices and Other 

Parameters Remain at Base-Case Values

0.16 0.19

1.22

442 

389

502

0

100

200

300

400

500

600

Small and medium-sized firms Large firms

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Annual premium, large firms ($ millions)

Annual premium, small and medium-sized firms ($)

BCPP

Chubb

PRIA
xvi Improving the Availability and Affordability of Pandemic Risk Insurance

As apparent from Table S.1, no program as currently proposed dominates the 

others on all the performance metrics. Rather, each has advantages and disadvantages 

in terms of the performance metrics of concern.

Limitations

This analysis provides information useful to assessing the advantages and disadvantages of different approaches for improving the availability and affordability of pandemic risk insurance. However, it does not seek to evaluate and compare the full range 

of policy options for addressing pandemic losses. Such a policy analysis would systematically compare the advantages and disadvantages of an insurance-based approach 

with a government-based approach, such as the PPP. That analysis would also take a 

more comprehensive view of some of the outcome measures used in this analysis. For 

example, in this report, we projected government net outlays directly through the proposed programs, but a more comprehensive analysis would include the indirect effects 

of the program on other government outlays.

The various proposals that we have examined contain several important gaps that 

remain to be filled—for example, 

• whether and how the parametric trigger would address firms either subject to a 

partial shutdown order or that experience substantial revenue decline but are not 

subject to a closure order 

• whether policies backed by PRIA would provide coverage for pandemic losses 

when the underlying business interruption policies require physical damage to 

the insured property 

• whether parametric policies would result in some firms receiving more compensation than they need and others less (basis risk).

In this analysis, we have in effect assumed that gaps are filled, thereby resulting in 

the right amount of assistance getting to the right firms, but additional work is needed 

to flesh out the proposals to deal with these and other gaps and to determine the extent 

to which unaddressed issues can be resolved. 
xvii

Abbreviations

B billions

BCC Business Continuity Coalition

BCPP Business Continuity Protection Program

BEIP Business Expense Insurance Program (Chubb)

BI business interruption 

BOP business owner policy

COVID-19 coronavirus disease 2019

G&SE general and selling expenses

GDP gross domestic product

LAE loss adjustment expenses

M millions

NAIC National Association of Insurance Commissioners

P&C property and casualty

Pandemic Re Pandemic Reinsurance Program (Chubb)

PPP Paycheck Protection Program

PRIA Pandemic Risk Insurance Act of 2020

T trillions

TRIP Terrorism Risk Insurance Program

ZPPP Zurich Preliminary Pandemic Program
1

CHAPTER ONE

Introduction

The COVID-19 pandemic led to a substantial drop in U.S. economic activity in the 

first part of 2020. Government stay-at-home orders, restrictions on business activities, 

and consumer concerns about potential exposure to the virus caused unemployment 

rates to rise and put many businesses in financial jeopardy. Businesses often purchase 

business interruption (BI) coverage for loss of revenue because of fires and other perils, 

but policies typically require that the interruption was due to physical damage at the 

insured property, and, in recent years, the policies have excluded loss due to contagious 

diseases. As a result, insurers have held that in most cases they are not obligated to 

cover the enormous BI closures caused by COVID-19.1

Using an insurance approach to address pandemic risk has several advantages. 

These include the ability to define benefits and a benefit distribution mechanism in 

advance rather than rely on a hastily crafted government program. Also, an insurance 

approach can leverage the deep capabilities of the commercial insurance industry to 

place policies and to adjust claims. Moreover, insurance can transfer some risk to the 

private sector.2

However, pandemic risk also creates a number of challenges for the private sector. 

The global reach of pandemics limits the ability of insurers to diversify and spread risk. 

As in the case of terrorism, pandemic impacts are very much determined by government decisions that make it difficult to estimate potential losses or price policies. In the 

case of pandemics, these decisions involve how broadly to restrict business and social 

activity.3 As a result, commercial insurers have little interest in providing coverage for 

1 Appendix A provides an overview of BI policies. 

2 In other settings, insurance can create incentives to reduce risk by providing premium reductions to policyholders that adopt risk mitigation measures. It is not obvious, however, whether insurance can create similar 

incentives to mitigate pandemic risk. As an example, consider a mitigation measure that would reduce seating 

capacity in a restaurant during an outbreak. Such a measure would increase revenue loss, justifying an increase, 

not decrease, in premium.

3 For a discussion of the insurability challenges posed by pandemics, see Hartwig, Robert, Greg Niehaus, and 

Joseph Qiu, “Insurance for Economic Losses Caused by Pandemics,” Geneva Risk and Insurance Review, Vol. 45, 

2020. 
2 Improving the Availability and Affordability of Pandemic Risk Insurance

pandemic-induced business closures or restrictions on business activity, as evidenced 

by the policy exclusions put in place before the COVID-19 outbreak and moves by 

insurers to broaden these exclusions in the wake of COVID-19.

Insurers, insurance industry trade groups, policyholder groups, and Congress 

have developed proposals that would enhance the role that insurance plays in providing 

businesses with the resources they need to maintain payroll and benefits and to cover 

the ongoing operating expenses during an outbreak. Some of these approaches are 

motivated by the federal Terrorism Risk Insurance Program (TRIP) that was adopted 

following the 9/11 attacks in response to the lack of insurance coverage for terrorism 

events. Other approaches are shaped by the particular features of pandemic risk.

Research Questions and Study Approach 

This report seeks to inform the discussion of the benefits and drawbacks of the different approaches for expanding insurance for pandemic-induced business closures or 

restrictions on business activity by addressing the following research questions:

• What are the distinguishing features of the most-visible proposals for a pandemic 

risk insurance program?

• How will these programs perform in terms of specific key dimensions: efficacy, 

efficiency, affordability, risk borne by commercial insurers, and the extent of policyholder subsidies?

Although this report will compare, to some extent, an insurance-based approach 

for addressing losses due to pandemics with an approach based on government programs, such as the Paycheck Protection Program (PPP), it does not seek to evaluate and 

compare the full range of policy approaches for addressing pandemic losses. Rather, it 

seeks to inform the debate on how society can best address pandemic risk by comparing the different insurance-related approaches and predict how they might perform 

under a range of assumptions. 

To address these research questions, we first identified the most-visible proposals 

and compared their key features. We then developed a high-level, quantitative model 

to project the key outcomes for each of the proposals. This model is based on a number 

of underlying parameters, and we reviewed economic and insurance literature and data 

to develop reasonable values for these parameters. We also consulted with experts in 

the field about what values would be reasonable.4 For each program, we projected out4 The experts we consulted had considerable knowledge about the cost components of and pricing practices for 

insurance policies or about the provisions of proposed pandemic risk insurance programs. Interviews followed a 

semistructured, open-ended format and were conducted via Microsoft Teams between November 2020 and April 

2021. 
Introduction 3

comes in a base case and then examined the sensitivity of the results to variation of the 

parameters over plausible ranges.

Report Organization

Chapter Two describes five pandemic insurance programs: three proposed by insurers 

or insurance industry associations, one proposed by a coalition of business policyholders, and one proposed by members of Congress. Chapter Three describes the modeling 

approach and the parameters used in the projections, while Chapter Four presents and 

discusses the projected outcomes for the base-case set of parameter values. Chapter Five 

examines the sensitivity of the results to changes in parameter values, and concluding 

comments are provided in Chapter Six. The provisions of a typical BI insurance policy 

are described in Appendix A. The equations that underlie the pandemic risk insurance model that we developed are presented in Appendix B. Appendix C provides an 

example of how insurance payments might be determined when a business is partially, 

as opposed to fully, shut down. Insurance industry data on general and selling expenses 

(G&SE) and loss adjustment expenses (LAE) by property and casualty (P&C) insurance line are provided in Appendix D.

5

CHAPTER TWO

Overview of Proposed Programs

In this chapter, we compare and contrast five of the most-visible proposals for providing business firms with the support they need to cover payroll, benefits, and ongoing 

operating expenses during the economic disruption caused by a pandemic. Three of 

these proposals have been offered by insurers or insurance industry groups, one has 

been offered by a policyholder group, and the final has been introduced as congressional legislation. In each case, we describe the policy offered to businesses (the policy 

features) and the features of the program provided to participating insurers (the program features). Businesses pay a premium to insurers for the coverage, and, in some 

cases, insurers pass on part of this premium to the federal government for the risk it 

bears. In the context of the proposed pandemic risk insurance programs, the risk sharing provided by the government is sometimes referred to as reinsurance and sometimes 

as a government backstop.

1 Insurers might or might not pay a premium for this coverage.

Proposal 1: Business Continuity Protection Program

The Business Continuity Protection Program (BCPP)—proposed by the American 

Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, and the Independent Insurance Agents and Brokers of America—

provides payroll, benefits, and support for ongoing operating expenses to the private 

sector in the event of a declared public health emergency.2 This revenue replacement 

assistance would be available through state-regulated insurance entities that voluntarily 

participate in the BCPP. 

1 Reinsurance refers insurance purchased by primary insurers from other insurers (the reinsurers). Primary insurers are insurers that write policies for the end customer—whether a business or an individual.

2 This description of the BCPP is based on American Property Casualty Insurance Association, Independent 

Insurance Agents and Brokers of America, Inc., and National Association of Mutual Insurance Companies, Business Continuity Protection Program, updated September 2020. 
6 Improving the Availability and Affordability of Pandemic Risk Insurance

Policy Features

The policy offered to businesses would provide up to three months of payroll, benefits, 

and ongoing operating expenses and would be available to all for-profit and nonprofit 

businesses (“Policy Features” section of Table  2.1). The revenue losses could occur 

anytime during the typical one-year policy period, meaning that a total of three times 

the monthly payroll, benefits, and ongoing operating expenses could be paid over the 

course of the policy. Purchase would be voluntary, although a strong opt-out would 

be required: Firms declining coverage would have to acknowledge in writing that they 

would be ineligible for benefits if a pandemic-related business closure occurs.

There is no waiting period before payments begin, and policyholders could select 

the policyholder co-pay, subject to a 20 percent minimum. Payment would automatically be triggered following a government declaration of a public health emergency and 

restricted to firms in the geographic area and industries identified in the closure order. 

Such a parametric trigger would avoid the need for the traditional claims adjustment 

process associated with indemnity policies. 

Several questions remain about how the trigger would work in practice. First, the 

proposal does not discuss whether payments would be triggered for firms that suffer 

revenue declines but are not directly subject to a shutdown order. For example, would 

payments be provided to a travel agency that can operate remotely but whose business 

drops because hotels are closed? 

Second, the proposal also does not discuss how partial shutdowns would be handled. When a business completely shuts down and its revenue falls to zero, a claim payment equal to payroll, benefits, and ongoing operating costs would allow the firm to 

maintain payroll and survive until the policy limit is reached. For a policy limit equal 

to three months of preshutdown payroll, benefits, and ongoing operating expenses, the 

coverage would last for three months under a complete shutdown. Claim payments 

would not cover preshutdown profits or the costs that the firm can readily reduce 

(variable costs). In a partial shutdown (for example, restaurants that are able to operate at 25 percent seating capacity and provide takeout service), revenue would not fall 

to zero. The BCPP proposal does not discuss how claim payment would be adjusted 

if this were the case. If the same claim payment were made as in a full shutdown, the 

firms would likely need to return some of the payment if the goal is to maintain payroll, benefits, and ongoing expenses but not to reimburse foregone profits. Appendix B 

describes how much would have to be returned under various scenarios. The analysis 

shows that firms would have to consider preshutdown profits and their success in 

reducing variable costs during the shutdown when determining how much of the parametric payment to return or reserve for future use. Whether and how such a process 

would be implemented remains to be specified.3

3 The proposal also does not address some of the regulatory issues associated with parametric insurance policies. 

Under some configurations, parametric policies might be considered financial derivatives and therefore might be 
Overview of Proposed Programs 7

Program Features

Insurer participation in the program is voluntary, but participating insurers would 

be required to offer the pandemic coverage to all firms that purchase specified lines 

of insurance. Insurers would be reimbursed for payments by the federal government. 

Thus, there is no insurer deductible or co-pay. The federal government would also 

reimburse participating insurers for the costs associated with selling policies and operating the program (G&SE), as well as for LAE. The BCPP leverages the capacity of 

commercial insurers to issue policies, collect premiums, and pay claims, but all loss 

payments and program costs would be funded by the federal government.

The BCPP proposes that the premium paid by policyholders be set at a percentage of policyholder revenue that does not vary over firm size or industry. The premium 

would be set “to ensure widespread take-up,” but it would be left to the government 

to determine what fraction of expected program costs would be recovered through the 

policyholder premium.4

As with the policy features of the BCPP proposal, some aspects of program features are not fully fleshed out. For example, insurer participation in the program is 

voluntary, and it is not clear what would happen to businesses whose insurers decided 

not to participate in the program. Would such business be able to buy coverage from 

other insurers, and, if so, how might the cost of the policy be affected? It might be 

more expensive for an insurer to set up coverage with a new policyholder than to add 

pandemic coverage on to an existing policy

Proposal 2: Chubb Pandemic Business Interruption Program

Chubb’s Pandemic Business Interruption Program has two parts. Part I, the pandemic 

Business Expense Insurance Program (BEIP), is open to small and medium-sized 

firms, which are firms with 500 or fewer employees. Part II, the Pandemic Business 

Interruption Reinsurance program (Pandemic Re), is open to firms with more than 

500 employees. We describe each program in turn.5

Chubb Business Expense Insurance Program

Policy Features

The BEIP provides coverage similar to the BCPP in many respects (as shown in 

Table 2.1). Payroll and expenses are covered (the proposal is silent on benefits) for up to 

three months, a simple parametric structure provides for accelerated claim payments, 

subject to oversight by the Commodities Futures Trading Commission, as opposed to state insurance regulators. 

Consideration of such issues is beyond the scope of this analysis.

4 American Property Casualty Insurance Association, Independent Insurance Agents and Brokers of America, 

Inc., and National Association of Mutual Insurance Companies, 2020, p. 3.

5 This description of the Chubb program is based on Chubb, Pandemic Business Interruption Program, Warren, 

N.J., July 8, 2020. 
8 Improving the Availability and Affordability of Pandemic Risk Insurance

Table 2.1

Features of Proposed Pandemic Risk Insurance Programs

Attribute 

Business Continuity 

Protection Program 

(BCPP)

Chubb 

Business Expense 

Insurance Program 

(BEIP)

Chubb Pandemic 

Business Interruption 

Reinsurance Program 

(Pandemic Re)

Zurich Preliminary 

Pandemic Program 

(ZPPP)

 Pandemic Risk 

Insurance Act (PRIA)

Business Continuity 

Coalition (BCC) Program

Policy Features

Firms eligiblea All firms Firms with ≤500 

employees

Firms with >500 

employees

Firms eligiblea All firms All firms

Losses covered Payroll, benefits, 

and ongoing 

expenses

Payroll and ongoing 

expenses

Payroll and ongoing 

expenses

Payroll, benefits, 

and ongoing 

expenses

Payroll, benefits, 

ongoing expenses, 

event cancellation

Payroll and fixed costs 

for a nondamage 

parametric BI policy; 

same coverage that 

is provided for other 

perils in standard P&C 

policies

Policyholder 

deductible

No waiting period 14-day waiting 

period

30-day waiting 

period (or longer, as 

desired)

Policyholder can 

select waiting 

period

Same as underlying 

BI policy

None for parametric 

policy; same as 

underlying P&C 

policies for other 

coverages

Policyholder 

co-pay

Policyholder choice 

with 20% minimum

None specified None specified 20% Same as underlying 

BI policy

None for parametric 

policy; same as 

underlying P&C 

policies for other 

coverage

Policy limit 3 months of payroll, 

benefits, and 

ongoing expenses

3 months of payroll, 

benefits, and 

ongoing expenses

3 months of payroll, 

benefits, and 

ongoing expenses 

capped at $50M per 

firm 

3 months of payroll, 

benefits, and 

expenses, capped at 

$20M per month for 

large firms ($60M 

over 3 months)

Same as underlying 

BI policy

90 days of payroll 

and fixed costs for 

parametric BI policy, 

same as underlying 

P&C policies for other 

coverage

Claim payment 

mechanism 

Parametric Parametric Indemnity Parametric with 

policyholder 

required to selfcertify losses

Indemnity Parametric and 

indemnity
Overview of Proposed Programs 9

Attribute 

Business Continuity 

Protection Program 

(BCPP)

Chubb 

Business Expense 

Insurance Program 

(BEIP)

Chubb Pandemic 

Business Interruption 

Reinsurance Program 

(Pandemic Re)

Zurich Preliminary 

Pandemic Program 

(ZPPP)

 Pandemic Risk 

Insurance Act (PRIA)

Business Continuity 

Coalition (BCC) Program

Policyholder 

purchase 

requirement

Voluntary with 

strong opt-out

Mandatory or 

voluntary with 

strong opt out

Voluntary Voluntary Voluntary Voluntary

Program Features

Insurer 

participation 

requirement

Voluntary Voluntary Voluntary Mandatory Voluntary Mandatory

Insurer offer 

requirement

Participating 

insurers required 

to offer to all 

policyholders who 

purchase covered 

lines of commercial 

insurance 

Mandatory offer Voluntary offer Mandatory offer 

to policyholders 

with fixed property 

coverage

Mandatory to 

policyholders who 

purchase business 

interruption 

coverage

Mandatory to 

businesses with P&C 

insurance

Program limit None $750B $400B No limit specified $750B No limit

Insurer 

deductible

$0 $0 $0 $0 5% of direct earned 

premium in specified 

lines

$0

Insurer co-pay 0% 6% up to $250B 

(rising to 12% over 

20 years); 0% above 

$250B 

5% up to $300B for 

first 5 years (rising to 

10% by year 10); 0% 

above $300B

0%, 5%, or 10%; 

insurers can assign 

individual policies to 

any pool

5% of losses above 

insurer deductible 

up to $750B

5%

Government 

charge for 

backstop

Premium set to 

ensure widespread 

take-up

None Market rate Below market 

rate; amount of 

premium ceded 

to government 

depends on pool 

chosen

None None during first 

5 years; following 

economic recovery 

period, government 

has authority to 

charge for backstop

Table 2.1—Continued
10 Improving the Availability and Affordability of Pandemic Risk Insurance

Attribute 

Business Continuity 

Protection Program 

(BCPP)

Chubb 

Business Expense 

Insurance Program 

(BEIP)

Chubb Pandemic 

Business Interruption 

Reinsurance Program 

(Pandemic Re)

Zurich Preliminary 

Pandemic Program 

(ZPPP)

 Pandemic Risk 

Insurance Act (PRIA)

Business Continuity 

Coalition (BCC) Program

Source of 

payment for 

insurer 

expenses

Government will pay 

fee for insurer G&SE 

and LAE

Premium covers 

G&SE and LAE

Included in 

premium; 3% 

for broker 5–7% 

for insurer 

administrative fee; 

claim handling 

fee not specified; 

Pandemic Re 

administrative and 

operating fee 0.25% 

of written premium 

Government 

pays commission 

to insurers that 

is 25–30% of 

premium ceded 

to government 

depending on pool 

chosen

Included in premium Not discussed

Premium Based on % of 

policyholder 

revenue; uniform 

across all firms; 

set to promote 

widespread take-up

Expected to be small 

relative to a firm’s 

overall insurance 

expenses

Both insurers and 

government are 

paid an appropriate 

risk-adjusted price 

for pandemic cover

Government sets 

premium with target 

of 2% rate on line 

for <500 employees 

and 3% rate on line 

for v500 employees

Not discussed Not discussed

Expected takeup rateNot discussed 90% 30% Varies by 

industry (90% for 

accommodations 

and food services, 

30% for utilities); 

65% economy-wide

Not discussed Not discussed

SOURCES: Author summary based on American Property Casualty Insurance Association, Independent Insurance Agents and Brokers of America, Inc., and 

National Association of Mutual Insurance Companies, 2020; Chubb, 2020; Zurich, Zurich’s Draft Concept for Facilitating Pandemic Protection, Los Angeles, 

Calif., December 7, 2020; U.S. House of Representatives, Pandemic Risk Insurance Act of 2020, H.R. 7011, May 26, 2020; Business Continuity Coalition, 

“BCC Proposal: A Proposal from the Policyholder Community,” September 2020.

a Includes both for-profit and nonprofit firms.

Table 2.1—Continued
Overview of Proposed Programs 11

and purchase is voluntary with a strong opt-out. Unlike the BCPP, there is a 14-day 

waiting period between when business closures or restrictions are announced and coverage begins, but there is no policyholder co-pay.

Program Features

Like the BCPP, insurer participation in the program is voluntary, and insurers choosing 

to participate must offer coverage to their policyholders. The major difference between 

the two programs is that, in Chubb’s proposal, the commercial insurers bear some 

risk. In the first year of the program, insurers pay 6 percent of claims up to $250 billion in policyholder losses—a maximum of $15 billion. The federal government pays 

100 percent of any additional losses up to $750 billion. The industry exposure rises to 

12 percent of the first $250 billion (up to $30 billion) over 20 years. 

The BEIP envisions a policyholder premium that covers the risk borne by commercial insurers. Insurers do not pay a premium to the government; thus, the policyholder premium does not include a component that covers the potential payments 

by the federal government. The BEIP proposal does not specify whether the government would reimburse commercial insurers for G&SE; however, given that there is no 

indication that the government would pay G&SE, it seems reasonable to assume that 

Chubb envisions these costs being built into the premium—all of which is kept by 

insurers. Given the strong opt-out and the subsidized premium, Chubb expects 90 percent of small businesses to participate in the program.

Pandemic Re

The objective of Pandemic Re is to promote a market-oriented program for large businesses. Purchase of coverage by the roughly 20,000 businesses with more than 500 

employees is voluntary, with no strong opt-out or requirement that insurers offer coverage to large firms.

Policy Features

The policy again looks similar to those offered by the BCPP and Chubb’s BEIP: Payroll 

and expenses are covered for three months with no policyholder co-pay. In this case, 

however, there is a 30-day waiting period, or longer if desired, and a $50 million cap 

on payments per policy. Importantly, traditional loss adjustment techniques are used, 

which are expected to be much more costly than those needed for parametric policies.

Program Features

Insurers pay 5 percent of insured losses up to $300 billion ($15 billion maximum), and 

again the government pays 100 percent of additional losses up to an overall program 

cap of $400 billion (government and commercial insurer claim payments combined).

In contrast to the BCPP and the BEIP, Pandemic Re is a program “in which both 

the insurance industry and the government are paid an appropriate risk-adjusted price 
12 Improving the Availability and Affordability of Pandemic Risk Insurance

for pandemic cover” (italics added).6 We take this to mean that the policyholder premium should cover (1) the expected loss payments and associated LAE for which commercial insurers are financially responsible, G&SE, and the costs of capital required by 

commercial insurers to mitigate their solvency risk and (2) the government’s expected 

loss payment and the associated LAE. This approach differs critically from the BEIP 

and BCPP, which charge insurers no premium for the government backstop. A pandemic return period must be assumed to calculate expected loss and LAE. As will be 

discussed in Chapter Three, the return period is the inverse of the annual probability 

that a pandemic occurs. Chubb assumes a 30-year return period (0.033 annual probability) in its proposal. 

Proposal 3: Zurich Preliminary Pandemic Proposal

Policy Features

The Zurich Preliminary Pandemic Proposal (ZPPP) is open to firms of all sizes and 

offers coverage very similar to what is offered by the BCPP and Chubb programs. Like 

the Chubb proposal, the ZPPP includes a limit on claim payments to large policyholders: $20 million per month or $60 million over three months for large firms, compared 

with $50 million in Chubb’s Pandemic Re proposal.

Program Features

The ZPPP proposes a flexible program (see Table 2.1) that allows insurers to choose 

how much risk to bear. Depending on how much risk insurers choose to bear, the program can end up looking quite similar to the BCPP. It can also end up looking very 

similar to the Chubb proposal. As will be discussed further, the ZPPP expects insurers 

to retain 1 percent of the risk, resulting in a program that is similar to the BCPP. The 

ZPPP is inspired by the federal crop insurance program, with which Zurich has considerable experience.7

Like the BCPP and Chubb proposals, insurers participating in the ZPPP must 

offer coverage to their customers with fixed property coverage. In contrast to the BCPP 

and Chubb proposals, insurers are required to participate in the ZPPP.

The main distinguishing feature of the ZPPP is that insurers can select how much 

risk to bear on a policy-by-policy basis. Insurers can place policies in pools in which 

100 percent of the premium and risk are ceded to the government, 95 percent is ceded 

to the government, or 90 percent is ceded to the government. By allocating across 

pools, insurers can tailor their portfolios to their risk appetites. One advantage of this 

approach is that insurers can adjust the risk they retain over time by modifying the 

6 Chubb, 2020, p. 4.

7 This description of Zurich’s program is based on Zurich, 2020. 
Overview of Proposed Programs 13

distribution of policies across pools. Zurich projects a very modest insurer risk appetite 

initially and estimates that 99 percent of the premium and risk would be ceded to the 

federal government in the first years of the program. 

Like the federal crop insurance program, policyholder premiums in the ZPPP 

are subsidized by the federal government.8 Zurich does not specify the amount of subsidy but envisions a rate on line of 2 percent for small and medium-sized firms and 

3 percent for large firms.9 This target premium can in principle be used to impute an 

implied level of subsidy.10 Insurer G&SE and LAE would be covered in part through 

a commission on the premium ceded to the pool. The ceding commission starts at 

25 percent for the 100 percent pool and rises to 30 percent for the 90 percent pool. 

The ceding commission structure provides an incentive for insurers to bear more risk. 

Insurers will also use the premium that they retain to cover G&SE, LAE, and the portion of loss payments for which they are responsible.

Zurich expects take-up to vary by industry, projecting in its program proposal, 

for example, 90 percent and 30 percent take-up rates for the accommodation and food 

services sector and utilities sector, respectively. Zurich expects take-up rate to average 

65 percent across the economy as a whole.11

Proposal 4: Pandemic Risk Insurance Act

Introduced by Representative Carolyn Maloney in May 2020, the Pandemic Risk 

Insurance Act of 2020 (PRIA) seeks to establish the Pandemic Risk Reinsurance Program modeled on the federal TRIP.12 PRIA requires participating insurers to make 

available in all BI policies coverage for losses from public health emergencies declared 

for infectious disease. All firms are eligible for the policy, and purchase is voluntary.13

In contrast to TRIP, insurer participation in the program is voluntary.

Policy Features

Participating insurers are required to make available coverage for pandemic-related 

losses that does not differ materially from that available for events other than public 

8 The federal subsidy in the federal crop insurance program amounts to approximately two-thirds of the 

premium. 

9 Rate on line is premium as a percentage of the amount of coverage provided. 

10 Zurich would implement a subsidy by allowing the government to use a longer return period in its determination of premium than would be required by the private sector.

11 The 65 percent economy-wide average is based on our conversations with analysts familiar with the Zurich 

proposal.

12 U.S. House of Representatives, 2020. 

13 See U.S. House of Representatives, 2020.
14 Improving the Availability and Affordability of Pandemic Risk Insurance

health emergencies. Coverage limits, waiting periods, and the type of expenses covered 

can vary across BI policies, and PRIA does not specify the amount and scope of coverage that should be provided. BI coverage typically includes such expenses as utilities 

and rent and lost profit. However, it might not cover payroll for employees that could 

easily be laid off and then rehired or replaced (see Appendix A for an overview of typical BI coverage). If this were the case, BI coverage backstopped by PRIA might not be 

sufficient to maintain prepandemic employment levels. In addition, BI coverage often 

applies only when there has been physical damage to the insured property. Policies that 

contain such physical damage requirements might not pay out when the cause of loss 

is a contagious disease. 

Program Features

Turning to PRIA’s risk-sharing provisions, insurers bear the first layer of loss (the 

insurer deductible) and then share losses above the deductible with the federal government. Mirroring TRIP, PRIA’s deductible for commercial insurers as a whole is 5 percent of the direct earned premium in specified insurance lines of business. As will be 

discussed in Chapter Three, the insurer deductible would have been roughly $12 billion in 2019. Insurers then are responsible for 5 percent of losses above the program 

deductible up to $750 billion in insured losses (the maximum industry exposure is thus 

roughly $49 billion).

Like the Chubb BEIP, the government does not charge a premium for the risk it 

bears in the PRIA proposal. Insurers will presumably set the premium to cover their 

share of loss payments and G&SE and LAE.

Proposal 5: Business Continuity Coalition Program 

The Business Continuity Coalition (BCC) program provides more-expansive coverage 

for pandemic-related loss than the other proposals. The BCC is composed of business 

insurance policyholders from across the U.S. economy.14

Policy Features

Insurers would be required to make available coverage for “insured losses related to 

covered public health emergencies” in all their P&C insurance policies.15 The BCC’s 

mandatory offer requirement is broader than PRIA’s. PRIA applies only to BI insurance, including event cancellation. In contrast, the BCC proposal applies to all P&C 

policies, including workers’ compensation, commercial general liability, directors and 

14 Business Continuity Coalition, homepage, undated.

15 Business Continuity Coalition, “Pandemic Risk Insurance Act Business Continuity Coalition Proposal: 

Section-by-Section Description,” March 2021. 
Overview of Proposed Programs 15

officers liability, excess insurance, and event cancellation (subject to several exceptions). The BCC proposal in addition requires insurers to make available to all their 

P&C policyholders parametric BI coverage. (Insurers can arrange for such coverage to 

be made available by an affiliate or a parametric insurance facility in which the insurer 

participates.) The parametric coverage would not require the incident to cause physical damage at the insured property. This parametric nondamage BI coverage would 

provide 90 days of fixed costs and payroll and would be triggered by certification of 

a public health emergency and a closure order for the policyholder’s North American 

Industry Classification System (NAICS) code. 

Program Features

Unlike the other proposed programs, all insurers would be required to participate in 

the BCC program. Insurers would bear 5 percent of the losses and the federal government 95 percent. There would be no cap on government or insurer outlays. Insurers 

would not be charged a premium for the quota share reinsurance provided by the government during an economic recovery period. The economic recovery period covers 

the five years following congressional enactment of the program and resets if there is a 

public health emergency during the five years following enactment. 

Discussion

The proposed programs share many features but also differ in important ways. The 

BCPP, Chubb, and Zurich proposals offer similar coverage for payroll, benefits, and 

ongoing operating expenses. PRIA takes a different approach by requiring insurers 

to make coverage available for pandemic-related losses that does not differ materially 

from that available for perils covered by BI provisions. The BCC proposal goes further by supporting insurance coverage for pandemic losses in other lines, such as event 

cancellation and directors and officers liability, in addition to providing payroll and 

operating expenses due to BI. 

The proposals leverage the underwriting and claim adjusting capabilities of the 

private sector but vary in the amount of risk borne by commercial insurers. Commercial insurers bear no risk in the BCPP, and insurers are responsible for up to $30 billion 

in loss payments in the Chubb proposal (small, medium-sized, and large firms combined) initially, doubling over 20 years. Commercial insurers are potentially responsible for $50 billion in losses under PRIA. However, the private insurer share is not 

large relative to total insured losses in any of the proposals. An attractive feature of the 

Zurich proposal is that insurers can adjust the risk they retain over time by modifying 

the distribution of policies across pools.

To reduce the costs of simultaneously adjusting a large number of claims, all 

but one of the proposals rely at least in part on a parametric trigger. The Chubb proposal takes a hybrid approach, using a parametric trigger for the vast majority of firms 
16 Improving the Availability and Affordability of Pandemic Risk Insurance

with employees that have 500 or fewer employees (discussed further in the following 

chapter) and an indemnity approach for the relatively few firms with more than 500 

employees. PRIA is the only proposal that does not specifically call for the use of a 

parametric policy, but insurers are presumably free to write policies with parametric 

triggers if they choose to do so.

Premiums are subsidized either explicitly or implicitly in all the proposals. PRIA 

and Chubb’s BEIP for small and medium-sized firms provide no payments to the federal government to cover the cost of the claim payments made by the federal government. The same is true for the BCC program during a five-year economic recovery 

period that can reset. The BCPP expects the government to use a long return period in 

calculating the price of the coverage it provides, and this return period may well exceed 

the actual return, causing premiums to be lower than actuarially justified. Chubb’s 

Pandemic Re for large firms appears to be the only program that does not rely on government subsidies, calling for a program “in which both the insurance industry and the 

government are paid an appropriate risk-adjusted price for pandemic cover.”16

Several important gaps need to be addressed in all these proposals. Whether and 

how the parametric trigger would address firms subject to partial shutdown order or 

firms that experience substantial revenue decline but are not subject to a closure order 

need to be worked through. PRIA might not result in broader coverage for pandemic 

losses if the underlying BI policies retain a requirement that revenue declines be caused 

by physical damage. In addition, standard BI coverage can include payroll and benefits for all employees, but provisions vary. If a goal is to maintain employment during 

a pandemic, PRIA may need to be modified to make it clear that policies would be 

required to support payroll and benefits for all employees (up to a certain limit), not 

just those who are difficult to replace if laid off.17 Insurer participation is voluntary in 

all proposals except the BCC’s. The potential for and consequences of low insurer participation are not addressed.

In following chapters, we model the potential effects of programs motivated by 

the BCPP, Chubb, and PRIA proposals. The results for these programs give insights 

into the performance of the Zurich and BCC programs; we do not separately model 

the Zurich and BCC programs. The ZPPP can perform quite similarly to the BCPP 

if insurers decide to retain only a very small portion of the risk or perform more like 

the Chubb program if insurers retain more risk. Zurich projects that 99 percent of risk 

will be transferred to the government at least initially and, if so, will look similar to the 

BCPP in the first years of the program.

16 Chubb, 2020, p. 4; italics added.

17 The potential for captive insurers to undermine the performance of the PRIA should also be considered. Captive insurers, which can provide coverage to a single insured, have come under much criticism in TRIP. Given 

that PRIA is modeled on TRIP, similar concerns are relevant for PRIA. For discussion of the captive insurer issue, 

see Centers for Better Insurance, Terrorism Risk Insurance Act: Shifting Risk Through Terrorism Insurance Captives, 

Frederick, Md., 2020. 
Overview of Proposed Programs 17

The BCC’s nondamage parametric BI insurance program has much in common 

with the BCPP and Chubb proposals, and we do not model it separately for the same 

reasons that we do not model the ZPPP. The other component of the BCC proposal 

expands coverage beyond the revenue replacement needed to maintain payroll, benefits, and ongoing operating expenses. Although coverage for various additional costs 

or liabilities that firms could face during a pandemic are potentially an important part 

of overall strategy to increase business resilience to pandemic risk, evaluating programs 

to increase the availability and affordability of such coverage is beyond the scope of 

this analysis. 

19

CHAPTER THREE

Modeling Approach and Base-Case Parameters

In this chapter, we first discuss our approach to modeling the effects of the proposed 

pandemic risk insurance programs on relevant outcomes. To do so, we describe the 

model inputs, the outputs, and the criteria used to evaluate program performance. We 

then motivate and specify the values for the input parameters used in the base-case 

simulations. As explained at the end of Chapter Two, we model the BCPP, Chubb, and 

PRIA proposals. The models are based on a number of simplifying assumptions for 

each program. In some cases, these assumptions were necessary because the program 

proposal was silent on a particular issue. In others, we made assumptions to simplify 

comparisons across programs. For example, the coverages provided by many of the 

proposals are similar but not identical. We standardized the coverage to allow use of an 

insurance demand function that enabled us to compare take-up rates across programs. 

Thus, we project outcomes for insurance programs that are similar, but not identical, 

to those proposed. Harmonizing some aspects of the proposals allows us to better highlight the strengths and weaknesses of the different approaches. 

Modeling Approach

As shown in Table 3.1, the pandemic risk insurance model takes as inputs the features 

of the risk, program and policy features, take-up rate for the BCPP, and the price elasticity of demand. It then predicts outputs, such as insured loss, the premium, program 

expenses, and the allocation of cost and risk between the private and public sectors. 

These outputs can then be used to construct the following performance metrics: the 

percentage of loss insured, program efficiency, the premium, risk borne by commercial 

insurers, and the share of program costs covered by premiums. In the remainder of the 

chapter, we detail the model inputs, model outputs, and performance metrics. The 

equations that underlie the model are presented in Appendix A.

Model Inputs 

The inputs begin with a characterization of the economic loss caused by a pandemic. 

Our focus is on providing insurance coverage that allows firms to maintain payroll 
20 Improving the Availability and Affordability of Pandemic Risk Insurance

and employee benefits and to cover ongoing operating expenses during the economic 

disruptions caused by a pandemic. We specify the number of firms affected by the pandemic and the amount of revenue that needs to be replaced in order to sustain payroll, 

benefits, and ongoing operating expenses at prepandemic levels (see the “Economic 

Loss from the Pandemic” section of Table 3.1). We model the outcomes of the various proposed programs under different assumptions about the frequency with which 

a pandemic occurs.1

The features of the insurance policy offered to business firms under the proposed 

program are fed into the model. These include the losses covered by the policy, the 

policyholder waiting period, the policyholder co-pay for losses following the waiting 

period, the coverage period, and the policy limit. The policyholder deductible is specified in weeks following the declaration by public authorities that triggers the policy. 

The coverage limit is specified in terms of the number of months of prepandemic payroll, benefits, and ongoing operating expenses. 

Model inputs also include the features of the proposed program (the “Program 

Features” section of Table 3.1). The firm sizes eligible for the program are specified. 

For this analysis, small and medium-sized firms (firms with fewer than 500 employees) 

1 A pandemic that occurs with annual probability p has a return period of (1/p) years.

Figure 3.1

Model Overview

Performance metrics

• Efficacy

• Efficiency

• Affordability

• Risk borne by commercial insurers

• Expected annual government outlays

• Policyholder subsidy

Inputs

• Economic loss due to 

a pandemic

• Return period

• Policy features

• Program features

• Program costs

• BCPP take-up rate

• Elasticity of demand

Outputs

• Loss

• Take-up rate relative to BCPP

• Insured loss

• General and selling expenses

• Loss adjustment expenses

• Capital costs

• Premium

• Losses incurred by insurers

• Losses incurred by government

Model
Modeling Approach and Base-Case Parameters 21

Table 3.1 

Model Inputs

Input Description

Economic Loss from the Pandemic

Firms affected Number of firms affected by pandemic

Required revenue 

replacement

Amount of business revenue that needs to be replaced to sustain payroll, 

benefits, and ongoing operating expenses at prepandemic levels

Return period The probability of an event occurring is assumed to be a dichotomous 

random variable with probability p. The return period is 1/p years.

Insurance Policy Features

Losses covered Revenue needed to cover payroll, benefits, and ongoing operating 

expenses

Policyholder waiting period A waiting period before coverage begins

Policyholder co-pay Proportion of loss after waiting period that is not covered by the 

insurance payment

Coverage duration The number of months following the waiting period during which losses 

will be covered

Policy limit Maximum dollar amount that can be paid to a policyholder in a single 

event

Program Features

Firms eligible Program eligibility based on firm size (as measured by number of 

employees)

Program cap Maximum aggregate claim payments allowed under the program

Insurer deductible The amount of claim payments that must be paid by commercial insurers 

before government claim payments begin

Insurer co-pay Proportion of claim payments above insurer deductible that is paid by 

commercial insurers

Program Costs

G&SE Broker commissions and other costs of selling policies and insurer costs 

of running the program; specified in dollars per policy

LAE ratio Costs of adjusting and paying claims; specified as a proportion of claim 

payments

Rate of return on capital Rate of return required on the capital commercial insurers hold for 

solvency risk

Diversification factor The diversification factor captures the extent that insurers can use 

surplus held for other hazards to reduce the amount of capital they need 

to support pandemic risk policies 

Return periods used in pricing The pandemic return periods that commercial insurers and the 

government use when pricing coverage; the return period used by 

insurers can differ from the return period used by government

Take-Up Rate

BCPP take-up rate Proportion of eligible firms that purchase coverage in the BCPP
22 Improving the Availability and Affordability of Pandemic Risk Insurance

are distinguished from large firms (firms with 500 or more employees). The insurer 

deductible and co-pay proposed in the program and the maximum aggregate claim 

payments allowed under the program (program cap) are specified.

The model requires parameters that are used to calculate the costs of running the 

program. G&SE per policy is specified to capture the broker and other costs associated 

with placing insurance policies and the administration and operation costs of the program. In standard insurance cost reporting, these costs are represented as a percentage 

of the premium. As discussed later is this chapter, we take a different approach because 

the premium does not reflect the full costs of the program in some cases. To calculate costs of adjusting and paying claims, an LAE ratio is applied to insured loss. The 

ratio depends on the adjustment process—lower for parametric policies and higher for 

indemnity policies. 

To mitigate solvency risk, insurers hold capital, and the rate of return that insurers 

must pay on this capital is specified. The diversification factor captures the extent to 

which insurers can use surplus held for other hazards to reduce the amount of capital 

they need to support pandemic risk policies. The capital cost of a program is determined by multiplying the rate of return on capital by the amount of capital required.

The model does not consider the government’s costs of administering and operating the program (however, government claim payments are of course included). As 

illustrated by TRIP, the government administrative and operating costs are not likely 

to be large relative to overall program outlays and might not vary a great deal across 

the programs examined. We also do not cost out the potential government expense of 

financing these payments. After adjusting for inflation, the cost of federal borrowing is 

currently very low (and perhaps even negative), and we ignore this cost in our analysis.

To project a premium that would be charged by a program, the pandemic return 

period used by insurers in setting prices is specified. The return period used by insurers 

can differ from that used by the government, and both return periods can be different 

from the actual return period, which is highly uncertain.

The percentage of eligible business firms deciding to purchase the policy (takeup rate) in the BCPP is also specified as an input. The take-up rate in the Chubb and 

PRIA programs are calculated by the model to be consistent with the difference in 

premiums across the programs.

Model Outputs

On the basis of these inputs, the model projects outputs relevant to the evaluation of 

each of the proposed pandemic insurance programs. Table 3.2 lists the model outputs 

and summarizes how they are calculated. Calculations are done separately for each of 

the modeled insurance programs using parameter values specified in the next section 

of this chapter. In the remainder of this section, we provide an overview of how each 

of the outputs is calculated. The equations used to calculate these outputs are provided 

in Appendix A.
Modeling Approach and Base-Case Parameters 23

Number of participating firms: The number of participating firms is the 

number of business firms eligible for the program multiplied by the take-up rate. The 

number of participating firms is calculated separately for small and medium-sized 

firms and large firms.

Loss should an event occur: This is the shortfall in revenue needed to sustain 

payroll, benefits, and ongoing operating expenses caused by the pandemic for all businesses nationwide at prepandemic levels. 

Insured loss should an event occur: This is the amount of loss that is reimbursed under the program. It is a function of both policy features (e.g., policyholder 

waiting period, the policyholder co-pay, the policy limit) and program features (e.g., 

any cap on overall outlays, take-up rate).

Losses incurred by commercial insurers should an event occur: These are the 

claim payments that are the financial responsibility of private insurers. Private insurers 

Table 3.2 

Model Outputs

Output Description

Number of participating firms Number of firms purchasing coverage; projected separately for 

small and medium-sized firms (<500 employees) and large firms 

(v500 employees)

Loss should an event occur Shortfall in revenue needed to sustain payroll, benefits, and 

ongoing operating expenses regardless of whether the decline 

is insured

Insured loss should an event occur Aggregate insurance payments based on policyholder waiting 

period, insurance co-pay, policy limit, and take-up rate 

Losses incurred by commercial insurers 

should an event occur

The loss borne by commercial insurers if an event occurs

Losses incurred by the government 

should an event occur

The loss borne by the government should an event occur

LAE should an event occur Cost of adjusting claims should an event occur

Annual G&SE Annual G&SE of the program; there are annual recurrences of 

G&SE regardless of whether a loss occurs

Capital held by commercial insurers 

for solvency risk 

Amount of capital held by commercial insurers to hedge against 

solvency risk 

Cost of capital for solvency risk Amount of capital needed by commercial insurers for solvency 

risk multiplied by cost of capital

Annual premium Determined by insured losses should an event occur, 

distribution of insured losses between government and 

commercial insurers, return period used in pricing, G&SE, LAE, 

and capital costs

Take-up rate Take-up rate consistent with the difference in premiums across 

programs and the take-up rate assumed for the BCPP
24 Improving the Availability and Affordability of Pandemic Risk Insurance

may be tasked with the administrative responsibility of paying the full claim, but losses 

incurred by commercial insurers pertain only to that portion of the claim payments for 

which insurers are financially responsible. The losses incurred by commercial insurers 

depend on the risk-sharing features of the proposed program.

Losses incurred by the government should an event occur: These are the 

part of claim payments that are the financial responsibility of the government. The 

losses incurred by the government depend on the risk-sharing features of the proposed 

program.

LAE should an event occur: These expenses are the administrative costs of 

adjusting and paying the claims. They are projected as a proportion of insured losses 

(using the LAE ratio) and differ depending on whether a traditional indemnity policy 

or parametric policy is used.

Annual G&SE: These expenses are the brokerage, commission, and other selling 

costs associated with placing the policies and the insurer costs of operating the program. Annual G&SE should be calculated by multiplying G&SE per policyholder by 

the number of firms participating in the program. G&SE per firm varies by firm size. 

Capital held by commercial insurers for solvency risk: The insurance industry’s cost of bearing pandemic risk includes the cost of the capital needed to ensure, 

with a given probability, that insurers have sufficient resources to finance claim payments.2 The planning probabilities that insurers are thought to use in making this 

decision are high—99 percent or higher.3 The planning probability determines the 

size of the insured loss that insurers plan for, and the amount of capital that insurers 

need to hold is the planning loss less the annual premium. For this analysis, we have 

assumed that whether a pandemic occurs is a dichotomous random variable and that 

insurers plan for an event that is of the same magnitude as the current event. The planning loss used in our analysis is thus insurer claims plus LAE should an event occur. 

When insurers cannot spread risk across other insurance lines, the amount of capital 

required is the planning loss less the annual premium net of G&SE and capital cost. 

The diversification factor captures the extent that insurers can use surplus held for 

other types of hazards to reduce the amount of capital they need to support their pandemic risk book of business. 

Cost of capital needed by commercial insurers for solvency risk: The cost of 

capital needed by insurers for solvency risk is the amount of capital multiplied by the 

cost of capital.

2 The risk that the premium or accumulated capital will not be adequate to cover claims can be referred to as 

solvency risk, volatility risk (the volatility of claim payments relative to premium revenue), or timing risk (the risk 

that a large loss will occur before sufficient premium has been collected). 

3 With a planning probability of 99 percent, there is a 1 percent chance that the loss will exceed the planning loss. 

Lloyd Dixon, Robert J. Lempert, Tom LaTourrette, and Robert T. Reville, The Federal Role in Terrorism Insurance: 

Evaluating Alternatives in an Uncertain World, Santa Monica, Calif.: RAND Corporation, MG-679-CTRMP, 

2007, p. 17. 
Modeling Approach and Base-Case Parameters 25

Annual premium: The premium is the sum of expected annual insured loss, 

expected annual LAE, annual G&SE, and the annual cost of capital required to hedge 

solvency risk. Expected annual insured loss is the product of the insured losses should 

an event occur multiplied by the inverse of the return period that is used in setting the 

premium. We will make different assumptions about the return period used by insurers and the government in setting prices. In some cases, the insured loss relevant to 

pricing is only the part of overall insured loss that is the responsibility of private insurers. In others, it is the total insured loss.

Take-up rate: The take-up rate in the Chubb and PRIA programs are calculated 

by the model to be consistent with the difference in premiums across the programs. As 

described in Appendix C, we use a constant-elasticity demand function to estimate the 

take-up rates in the Chubb and PRIA programs, given the premium and take-up rate 

in the BCPP model. The take-up rates for the Chubb and PRIA programs are thus best 

interpreted as relative to the BCPP take-up rate. 

Performance Metrics

Program performance is evaluated across six dimensions: efficacy, efficiency, affordability, risk borne by commercial insurers, expected annual government net outlays, 

and policyholder subsidy. 

Efficacy is measured in the terms of the percentage of losses that are insured 

(Table 3.3). The percentage of losses that are insured depends on the take-up rate, the 

characteristics of the policy offered under the program, and the program cap. This 

measure of efficacy assumes that insurance payments are delivered to the firms that 

need them and are used to support payroll, benefits, and ongoing operating expenses 

rather than, for example, profit. As discussed in Chapter Two, further work is needed 

to flesh out the proposal details that will determine the extent to which this turns out 

to be the case.

The ratio of claim payments to the overall costs of the program is a measure of 

program efficiency. It measures the fraction of overall resources consumed by the program that result in claim payments to policyholders.

Affordability is characterized by the annual premium per firm, the annual premium per $1,000 payroll, and the premium per $1,100 coverage. Average premium per 

firm is most relevant to an average-sized firm and does not capture how the premium 

might vary by firm size. Average premium per $1,000 payroll normalizes the premium 

by a measure of firm size but assumes that the policy pricing per $1,000 payroll will 

not vary by firm size. Premium per $1,000 coverage is the ratio of the premium to the 

amount of coverage provided by the policy.4

4 In calculating premium per $1,000 coverage, we deduct the policyholder co-pay from the policy limit. We do 

not consider the overall program cap in calculating premium per $1,000 coverage, arguing that the individual 

policyholder does not know whether the cap will be binding when purchasing the coverage. 
26 Improving the Availability and Affordability of Pandemic Risk Insurance

Several metrics are used to characterize the risk borne by commercial insurers:

• The loss and LAE borne by commercial insurers if an event occurs measure the 

risk borne by commercial insurers.

• The capital required by commercial insurers for solvency risk reflects the cost of 

requiring commercial insurers to bear some of the pandemic risk. When compared with overall insurance industry surplus, the capital required provides a 

Table 3.3 

Measures Used to Evaluate Program Performance

Performance Metric Significance

Efficacy

Percentage of losses that are 

covered

A higher share of losses that are insured reduces the impact of a 

pandemic on firms and employees

Percentage of losses that are 

insured for firms that participate 

in the program

A higher share of losses that are insured reduces the impact of a 

pandemic on firms and employees

Efficiency

Ratio of claim payments to overall 

program costs

Measures the efficiency of the program in providing insurance 

payment to policyholders

Affordability

Annual premium per firm and per 

$1,000 payroll

High premiums can reduce willingness to purchase policies, 

increasing the economic consequences of a pandemic for firms and 

employees

Premium per $1,000 coverage Premium divided by amount of coverage provided by insurers

Risk Borne by Commercial Insurers

Insurer incurred loss and LAE 

should an event occur 

A measure of the role commercial insurers play in bearing 

pandemic risk

Capital required by commercial 

insurers for solvency risk 

When compared with industry surplus, provides a sense of how 

difficult it will be for the insurance industry to bear the risk 

envisioned under the proposed program

Percentage of overall program 

costs borne by insurers

Measures the role that commercial insurers play in funding loss 

payment and program expenses

Expected Annual Net Government Outlays

Expected annual government net 

outlays

Measures the fiscal burden the program places on the government

Policyholder Subsidy

One minus the ratio of premium to 

overall program costs

Measures the share of overall program costs subsidized by the 

government as opposed to being borne by policyholders
Modeling Approach and Base-Case Parameters 27

sense of how difficult it would be for the insurance industry to bear the level of 

risk envisioned under the program.

• The percentage of overall program costs borne by commercial insurers measures 

the financial responsibility of insurers for claim payments, LAE, and program 

costs relative to the government.

Expected annual government net outlays are calculated by subtracting annual 

premium transmitted to the government from expected annual government outlays. 

This metric measures the direct financial burden the program places on the government. When assessing the effect of a pandemic insurance program on government net 

outlays, one should compare all government outlays when the pandemic insurance 

program is in place with government outlays in the absence of a pandemic insurance 

program. Relevant to this comparison would be not only government outlays for insurance claims but also any assistance the government might provide for uninsured losses. 

For example, if the government covered all uninsured losses, the government would 

ultimately cover all losses less the amount of claim payments funded by commercial 

insurers. Direct government outlays through the program are a useful metric of program performance, but a full analysis of the effect of program outlays would consider 

the indirect effect of the program on government outlays outside the program. Such an 

analysis is beyond the scope of this study. 

Policyholder subsidy is defined as the ratio of premium to overall program costs 

subtracted from 1.0 and captures the share of program costs covered by the private 

sector as opposed to being subsidized by the government. As discussed previously in 

this chapter, the government’s costs of operating its part of the program and costs of 

financing government claim payments are not included in this measure.

Base-Case Parameter Values

We base the parameter values on the features of the proposed program (Table 2.1) and 

on relevant economic and insurance industry data. The models are also based on a 

number simplifying assumptions for each program. In some cases, these assumptions 

were necessary because the program proposal was silent on the particular issue. In 

others, we made assumptions to simplify comparisons across programs. For example, 

the coverages provided by many of the proposals are similar but not identical. We standardized the coverage to allow use of a demand function that enables us to compare 

take-up rates across programs and to better compare the strengths and weaknesses 

of different approaches. Thus, we project outcomes for insurance programs that are 

similar, but not identical, to those proposed. To streamline the following description 

of the base-case parameter values, we sometimes refer to the BCPP, Chubb, and PRIA 

approaches simply as BCPP, Chubb, and PRIA, respectively. 
28 Improving the Availability and Affordability of Pandemic Risk Insurance

Economic Loss Parameters

We start by characterizing the overall size of the U.S. economy. We model the effects 

of the proposed program on the approximately 6 million firms with employees in the 

United States (Table 3.4). The U.S. Census Bureau’s Survey of U.S. Business reports 

that payroll for these firms totaled $6.73 trillion in 2017. Small and medium-sized 

firms (firms with less fewer 500 employees) accounted for 5.98 million of the 6 million firms with employees and about approximately 40 percent of the payroll. Approximately 20,000 firms had 500 or more employees (large firms) and accounted for 

approximately 60 percent of the payroll ($199 million per firm).5

There are also many firms without employees.6 The U.S. Census shows 26.5 million nonemployee firm establishments in 2018 (a firm can have multiple establishments), with $1.29 trillion in receipts.7 We do not include these firms in our analysis. 

Even though the $1.29 trillion in receipts for nonemployee firms is small relative to 

the $37.4 trillion in receipts for firms with employees, providing revenue replacement 

assistance for nonemployee firms may be an important part of a pandemic strategy; 

5 U.S. Census Bureau, “Number of Firms, Number of Establishments, Employment, Annual Payroll, and Preliminary Receipts by Enterprise Employment Size for the United States, All Industries: 2017,” Excel file, March 6, 

2020.

6 Firms without employees are most concentrated in such industries as performing arts and passenger transportation but appear in practically every industry. For more information on nonemployer businesses, see U.S. Small 

Business Administration, Office of Advocacy, “A Look at Nonemployer Businesses,” factsheet, August 2018.

7 U.S. Census Bureau, 2020.

Table 3.4

Distribution of Firms in the United States with Employees by Firm Size in 2017

Number of 

Employees 

Firms Payroll

Average Payroll 

per Firm

Number of 

Firms

Percentage of 

Total

Payroll 

($ billions)

Percentage of 

Total

1 to 4 3,698,086 61.7 277 4.1 74,904

5 to 9 1,009,851 16.8 255 3.8 252,512

10 to 19 631,981 10.5 338 5.0 534,826

20 to 99 544,485 9.1 928 13.8 1,704,363

100 to 499 92,358 1.5 914 13.6 9,896,273

500+ 20,139 0.3 4,013 59.7 199,265,108

Total 5,996,900 100.0 6,725 100.0 1,121,413 

SOURCE: U.S. Census Bureau, 2020.

NOTE: Percentages are rounded.
Modeling Approach and Base-Case Parameters 29

however, analysis of extending the pandemic insurance programs to such firms was 

beyond the scope of this study.

Data of the ratio of benefits to payroll are used to scale up payroll totals to include 

employee benefits. According to the U.S. Bureau of Labor Statistics, benefits in the 

private sector are 42 percent of wages, increasing the $6.73 trillion in payroll to $9.55 

trillion.8

Internal Revenue Service Statistics of Income data for corporations provide a 

basis for estimating ongoing operating expenses. Ongoing operating expenses cannot 

be easily reduced when firm revenue declines if the firm expects to survive. Examples include rent; mortgage, insurance, and loan payments; and the costs of security 

services and utilities. These data indicate that ongoing operating expenses account 

for between 7 and 20 percent of revenue, depending on what expense categories are 

included in the total.9 Applying the midpoint of this range to the $37.4 trillion in 

revenue for firms with employees yields $5.05 trillion in annual ongoing operating 

expenses (see Table 3.5).

Starting with these estimates of prepandemic economic activity, we use economic 

data for the COVID-19 pandemic to provide an estimate of the payments needed to 

maintain payroll and benefits and to cover the ongoing operating expenses needed 

to stay in business. If the economy completely shuts down, $1.21 trillion per month 

would be required to enable firms to keep payroll and benefits at prepandemic levels 

and cover ongoing expenses.10 However, the economy will not completely shut down. 

Many businesses will continue to operate, perhaps at reduced levels.

One measure of the economic impact of COVID-19 is the change in employment. Overall employment fell approximately 15  percent between February 2020 

(pre–COVID-19) and April–May 2020.11 The federal PPP, passed as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), moderated employment 

declines.12 Some researchers found that the PPP increased U.S. employment by about 

8 U.S. Bureau of Labor Statistics, “Employer Costs for Employee Compensation—September 2020,” December 17, 2020.

9 The following expense categories are included for the lower estimate: repairs and maintenance, rent paid, taxes 

and licenses, and interest paid. The upper estimate adds in the “other deductions” category. Internal Revenue 

Service, Statistics of Income—2017: Corporation Income Tax Returns, Washington, D.C., 2020.

10 ($9.55 trillion in annual payments and benefits + $5.05 trillion in annual expenses)/12.

11 Michael Dalton, Elizabeth Weber Handwerker, and Mark A. Loewenstein, “Employment Changes by 

Employer Size During the COVID-19 Pandemic: A Look at Current Employment Statistics Survey Microdata,” 

Monthly Labor Review, U.S. Bureau of Labor Statistics, October 2020. The percentage drops in employment by 

firm size reported in this article are combined with Survey of U.S. Business data on employment by firm size to 

generate an estimate of the decline in overall employment (U.S. Census Bureau, 2020).

12 Pub. L. 116-136, Coronavirus Aid, Relief, and Economic Security Act, March 27, 2020.
30 Improving the Availability and Affordability of Pandemic Risk Insurance

Table 3.5

Base-Case Parameter Values for Modeled Programs

Parameter

BCPP Base 

Program Chubb BEIP

Chubb 

Pandemic Re PRIA

Revenue Replacement Needed to Sustain Prepandemic Payroll, Benefits, 

and Ongoing Expenses for 12 Months

Firms affected 6.00M 5.98M 20,000 6.00M

Annual payroll and 

benefits

$9.55T $3.82T $5.73T $9.55T

Annual ongoing 

operating expenses

$5.05T $2.02T $3.03T $5.05T

Revenue needed to 

sustain prepandemic 

payroll, benefits, 

and expenses during 

pandemic

$1.23T $0.493T $0.740T $1.23T

Policy Features

Losses covered Payroll, benefits, 

and ongoing 

expenses

Payroll, benefits, 

and ongoing 

expenses

Payroll, benefits, 

and ongoing 

expenses

Payroll, benefits, 

and ongoing 

expenses

Waiting period None None None None

Policyholder co-pay 20% 20% 20% 20%

Coverage duration 12 months 12 months 12 months 12 months

Policy limit 3 months of 

payroll, benefits, 

and ongoing 

expenses

3 months of 

payroll, benefits, 

and ongoing 

expenses

$50M per firm 3 months of 

payroll, benefits, 

and ongoing 

expenses

Program Features

Firms eligible 6.00M 5.98M 20,000 6.00M

Insurer deductible $0 $0 $0 $12B

Insurer co-pay 0% 6% up to $250B; 

0% above $250B

5% up to $300B; 

0% above $300B

5% of losses above 

insurer deductible

Limit on insured losses 

(program cap) 

None $750B $400B $750B
Modeling Approach and Base-Case Parameters 31

2.3 million workers (or 1.4 percent of 2017 employment).13 Adding this effect to the 

observed change in employment implies that COVID-19 would have reduced employment by 16.4 percent absent the PPP. Another broad measure of economic activity, 

U.S. GDP, declined approximately 9 percent between the first quarter of 2020 and the 

second quarter of 2020 before subsequently rebounding.14

Data on changes in firm revenue during the pandemic are not available. For this 

analysis, we calculate the percentage drop in employment for each month between 

March 2020 and February 2021 relative to February 2020. The result for each month 

provides a measure of the proportion of February 2020 payroll that would have to be 

provided that month to maintain payroll at February 2020 levels. Over the 12-month 

period between March 2020 and February 2021, these changes in percentages sum 

to 93 percent of February 2020 employment. Adding 1.4 percent per month for six 

13 David Autor, David Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B. Peterman, 

David Ratner, Daniel Villar, and Ahu Yildirmaz, “An Evaluation of the Paycheck Protection Program Using 

Administrative Payroll Microdata,” unpublished manuscript, July 22, 2020.

14 U.S. Bureau of Economic Analysis, “Gross Domestic Product, Third Quarter 2020 (Advance Estimate),” webpage, last modified October 30, 2020.

Parameter

BCPP Base 

Program Chubb BEIP

Chubb 

Pandemic Re PRIA

Program Cost Assumptions

G&SE per policy for 

small and medium size 

firms

$100 $100 NA $100

G&SE per policy for 

large firms

$10,000 NA $10,000 $10,000

LAE ratio 0.04 0.04 0.15 0.15

Cost of insurer capital NA 9% 9% 9%

Diversifiability index NA 0.5 0.5 0.5

Pandemic return period 

used by insurers

NA 5 years 5 years 5 years

Pandemic return period 

used by the government

200 years NA 5 years NA

Take-Up Rate

BCPP take-up rate 65% NA NA NA

Price elasticity of 

demand

NA –0.50 –0.50 –0.50

NOTE: NA = not applicable.

Table 3.5—Continued
32 Improving the Availability and Affordability of Pandemic Risk Insurance

months to account for the effects of the PPP increases the total to 101.4 percent of 

monthly employment. Applying this percentage to the estimate of monthly payroll, 

benefits, and ongoing operating expenses means that required payments come to 

approximately $1.23 trillion over a 12-month period (see Table 3.5).15

Policy Features

The policy offered to firms in each of the modeled programs covers payroll, benefits, 

and ongoing operating expenses. The program proposals contain different provisions 

for the policyholder co-pay. For example, the BCPP includes a 20 percent co-pay, while 

a co-pay is not discussed in the Chubb proposal (see Table 2.1). To facilitate comparison of the different proposals, we assume a 20 percent co-pay for each program. As 

discussed in Chapter Two, the coverage provided under PRIA would be the same as the 

underlying BI policy, and a number of issues would need to be addressed before payroll, 

benefits, and ongoing operating expenses during a shutdown would be guaranteed. We 

assume that these issues are resolved and that the coverage purchased through PRIA 

would provide payments needed to maintain payroll, benefits, and ongoing expenses. 

Unlike standard BI policies, profits would not be covered.

The BCPP and Chubb BEIP for small and medium-sized firms set the policy 

limit at three times monthly payroll, benefits, and ongoing expenses. Consistent with 

the proposal, payments are capped at $50 million per firm in the Chubb’s Pandemic 

Re program for large firms. As discussed in Appendix A, there is typically no dollar 

limit on time-limited BI policies, and we do not include one for the PRIA program. 

Program Features

The program features assumed in the simulations mirror those in the program proposals. The BCPP and PRIA are open to all firms, so all 6 million firms with employees 

are eligible. The number of firms eligible for the two Chubb programs is based on the 

number of firms in each firm-size category. 

The insurer deductible in PRIA is 5 percent of the premium in specified insurance lines. The direct written premium in these lines totaled $239 billion in 2019, 

resulting in an industry deductible of $12 billion.16 Under PRIA, insurers are thus 

responsible for the first $12 billion of insured losses. There is no insurer deductible in 

the other programs. Above the deductible, insurers are responsible for 5 or 6 percent of 

insured losses up to a specified threshold (the “Program Features” section of Table 3.5), 

with the government covering the rest. Some programs cap the amount of insured 

15 1.014*($9.55 trillion + $5.05 trillion)/12 = $1.23 trillion. 

16 National Association of Insurance Commissioners data via S&P Global Intelligence, provided to RAND by 

the American Property Casualty Insurance Association. The lines of business included in the total are aircraft, 

allied lines, boiler and machinery, commercial multiple peril (liability and nonliability), excess workers’ compensation, fire, inland marine, ocean marine, product liability, and workers’ compensation.
Modeling Approach and Base-Case Parameters 33

losses. PRIA caps insured losses at $750 billion per calendar year, and Pandemic Re 

caps them at $400 billion. Consistent with TRIP, we assume in the base case that 

the government will reimburse insurers for LAE on the portion of insured losses that 

the government assumes.17 The sensitivity analysis will explore how much the results 

change when this is not the case. 

Program Cost Assumptions

General and Selling Expenses

The insurance industry generally reports G&SE as a ratio of G&SE to the premium. 

The ratio was 0.176 for the P&C industry overall over the last five years (Table D.1 in 

Appendix D).18 Using a G&SE ratio to calculate G&SE in this study presents challenges because we do not have a full premium to which to apply the G&SE ratio. The 

premium in the different programs is subsidized to varying degrees. What is more, 

different return periods are used in calculating the premium for the different programs, and these different return periods generate very different premium levels and 

thus G&SE when the ratio of G&SE to the premium is constant. It seems reasonable 

to expect, in contrast, that the G&SE should be insensitive to the return period that is 

used to determine the premium.

A better approach in this case is to estimate the G&SE per policy. Data on G&SE 

per policy are not generally available, so we piece together information from different 

sources to come up with plausible estimates. Data available from the National Flood 

Insurance Program (NFIP) indicate that G&SE average $199 per policy.19 The vast 

majority of NFIP policies are written on residential structures. Data on the residential homeowners insurance market in California show G&SE of $222 per policy.20

These studies both suggest G&SE costs of approximately $200 for residential policies. 

17 Insured loss in TRIP “includes reasonable loss adjustment expenses, incurred by an insurer in connection with 

insured losses, that are allocated and identified by claim file in insurer records, including expenses incurred in 

the investigation, adjustment, and defense of claims, but excluding staff salaries, overhead, and other insurer 

expenses that would have been incurred notwithstanding the insured loss” (31 CFR 50.4[n]). 

18 As shown in Appendix A, there was not a great deal of dispersion across lines, with the median ratio of 0.21 

and 80 percent of the 30 lines falling between 0.166 and 0.370. The G&SE ratio for the line in which BI policies 

are concentrated (commercial multiple peril, nonliability) is 0.242.

19 For the National Flood Insurance Program, agency commissions and selling expenses are 28.9 percent of 

$3.39 billion in premium in 2019. Dividing the product by the 5.10 million National Flood Insurance Program 

policies results in G&SE of $199 per policy (National Flood Insurance Program, Federal Emergency Management Agency, The Watermark, Vol. 11, June 2020).

20 NAIC reported the G&SE for the homeowners multiple peril line as 26.2 percent of $8.07 billion in premium 

in 2018, or $2.11 billion (National Association of Insurance Commissioners, Report on Profitability by Line by 

State in 2018, Kansas City, Mo., 2019). Dixon, Tsang, and Fitts reported that there are approximately 9.5 million 

homeowners policies in California (Lloyd Dixon, Flavia Tsang, and Gary Fitts, The Impact of Changing Wildfire Risk on California’s Residential Insurance Market, Sacramento: California Natural Resources Agency, August 

2018). Dividing $2.11 billion by 9.5 million policies results in $222 per policy.
34 Improving the Availability and Affordability of Pandemic Risk Insurance

National Association of Insurance Commissioners (NAIC) data combined with rough 

estimates of the number of business firms with insurance policies provide a rough 

estimate of the G&SE per policy for commercial policies. NAIC reports $7.72 billion in G&SE for the commercial multiple peril, nonliability line in 2018, which is 

the line in which the majority of BI policies are written. Approximately 3.8 million 

business owner policies (BOPs) were in place in 2018.21 BOPs provide BI coverage and 

are reported in the commercial multiple peril line. These two figures produce what is 

likely an upper estimate on G&SE: approximately $2,030 per policy. If 5 million of the 

6 million firms with employees have commercial multiple peril nonliability policies, 

the average falls to approximately $1,540.

It seems reasonable to expect that the G&SE for the proposed pandemic risk 

insurance programs will be lower than these estimates for commercial multiple peril 

nonliability policies. The pandemic coverage will be added on to existing policy coverage, and the incremental cost might not be large. In addition, the streamlined nature 

of the policy placement process should limit G&SE. We thus set G&SE at $100 per 

policy for small and medium-sized firms in the base case. It is reasonable to expect 

G&SE to be higher for large firms. Payroll per firm is approximately 450 times higher 

at large firms than small and medium-sized firms. To reflect this large difference in 

firm size, we assume in the base case that the G&SE amount is 100 times larger than 

small and medium-sized firms—or $10,000 per firm.

We use the same G&SE per policy for all the programs. Chubb’s Pandemic Re 

program and PRIA take a more traditional approach to underwriting and claim adjusting than does the BCPP and Chubb BEIP. However, the pandemic insurance coverage 

will typically be added to other coverage being provided, and the incremental G&SE 

in Pandemic Re and PRIA will likely not be as large as the G&SE when writing the 

coverage from scratch. Absent better information about the incremental G&SE for 

these programs, we assume that the G&SE amount for the Chubb Pandemic Re and 

PRIA programs is the same as for BCPP and BEIP.

LAE Ratio

The LAE ratio for the P&C industry as a whole was 0.179 over the last five years 

(Table D.2 in Appendix D). The LAE ratio for the insurance line in which BI policies 

are concentrated (commercial multiple peril, nonliability) is 0.11. The proportion of 

losses from BI loss in that line is likely modest, however, and 0.11 might not be a good 

estimate for BI policies. BI policies are typically indemnity policies and can require 

detailed forensic investigation, generating substantial LAE. Data on the LAE for BI 

indemnity policies are not available, but it stands to reason that the LAE ratio for BI 

policies is higher than the 0.11 for the commercial multiple peril, nonliability line, as a 

whole. On the basis of these considerations, we set the LAE ratio at 0.15 for indemnity 

21 Figures provided to authors by Verisk’s Insurance Services Office via the American Property Casualty Insurance Association.
Modeling Approach and Base-Case Parameters 35

policies in the base case. It remains possible, however, that insurers will develop morestreamlined LAE for indemnity policies. It also possible that the surge in demand for 

adjustors in a pandemic that affects the nation as whole pushes the LAE ratio above 

the base-case value assumed (and results in substantial delays in claim payments). We 

investigate the consequences of both lower and higher LAE ratios in Chapter Five.

The LAE ratio for the parametric policies envisioned in the BCPP and Chubb 

BEIP proposals is expected to be much lower. Data on parametric policies that have 

been used in other settings could provide the basis for estimating the LAE ratio in a 

parametric pandemic risk insurance program. However, we have not been able to collect such information. What is more, the experience in other settings might not be particularly informative because the number of policyholders involved in other settings is 

typically small—unlike the potentially millions here. For this analysis, we set the LAE 

ratio for parametric policies to 0.04, on the basis of the advice of experts we spoke with 

during this study.22

Cost of Capital

In terms of the rate of return that insurers would be required to pay on capital held to 

mitigate solvency risk, Kielholz found that the cost of capital for insurance companies 

ranged from approximately 8 to 11 percent above the risk-free rate of return between 

1992 and 1998.23 In a more recent study, Barinov et al. found that the cost of equity 

capital for P&C insurers ranged from approximately 6 to 10 percent between 2009 

and 2014.24 Because of these findings, we set the cost of capital to 9 percent in the base 

case.

Diversifiability Index

The diversifiability index captures the extent that insurers can use surplus held for 

other types of hazards to reduce the amount of capital they need to support pandemic 

risk policies. The index varies between 0 and 1. A value of 0 means that that pandemic 

risk has no diversification benefit to insurers and that decisions on how much capital 

is required to support the coverage are made assuming that coverage for a pandemic is 

a completely separate line of business. A value of 1 means that insurers believe that no 

additional capital is needed to support the risk. Lacking better information, we set the 

22 Table D.2 in Appendix D identifies a number on P&C insurance lines with LAE ratios in the neighborhood 

of 0.04.

23 Walter Kielholz, “The Cost of Capital for Insurance Companies,” Geneva Papers on Risk and Insurance, 

Vol. 25, No. 1, January 2000, p. 16. Kielholz’s analysis focused on the use and cost of equity. He pointed out that 

although insurers do use debt financing, it is typically a small portion of the total capital structure (p. 5). This 

observation, though, applies to the time when this article was written. We base our estimates of the cost of insurer 

capital on the cost of equity capital.

24 Alexander Barinov, Jianren Xu, and Steven W. Pottier, “Estimating the Cost of Equity Capital for Insurance 

Firms with Multiperiod Asset Pricing Models,” Journal of Risk and Insurance, Vol. 87, No. 1, 2020.
36 Improving the Availability and Affordability of Pandemic Risk Insurance

diversification factor at 0.5 and allow it to vary between 0.25 and 0.75 in the sensitivity analysis.

Pandemic Return Period

The pandemic return period plays a critical role in the cost and performance of the 

proposed programs. The projected premium in each program requires an assumption 

on the return period that insurers use in pricing the coverage or an assumption on the 

return period the government uses in setting the premium—or both. In addition, the 

evaluation of overall program performance requires an estimate of the actual overall 

return period, which may differ from that used by insurers and the government in pricing. We discuss each in turn.

There is a great deal of uncertainty about the return period for a pandemic the 

size of COVID-19. Table 3.6 lists major contagious disease outbreaks since 1918 and 

the number of deaths worldwide associated with each. Also reported are measures of 

transmissibility and severity used by the Centers for Disease Control to characterize 

events. The last event of comparable magnitude in the United States was the Spanish 

flu in 1917 and 1918 (the 1918 pandemic); consequently, COVID-19 is often referred 

to as a one-in-100-year event. If the 1957 Asian flu is also considered a major pandemic, the average return period based on these three events is 50 years. If the 1968 

pandemic, which caused 1 million deaths, is also included, the average return period 

declines to 33 years. Given increases in population density and global interconnectedness and a changing climate, major pandemics could become more frequent. However, 

continued advances in vaccine technology and early detection capabilities could work 

in the opposite direction.

During discussions with informed stakeholders, we heard that insurers will likely 

assume a very short return period in setting premiums, at least initially. Part of the 

reason is that COVID-19 and its variants will still be lurking for several years, making 

resurgence more likely. A short return period may also be necessary if insurance regulators are to approve insurer plans to raise equity capital or take on debt to support 

the risk. In addition, a short return period may be necessary to convince investors to 

provide capital at rates that have typically been paid by the industry (see the preceding 

discussion of the cost of capital). Some of those with whom we conferred thought that 

return periods might need to be as short as two or three years initially, lengthening if 

there is no recurrence in the next few years. Chubb uses a 30-year return period in its 

calculations of likely premiums in its proposed programs, but this longer return period 

rests on the important assumption that the programs will not apply to SARS-CoV-2 

virus or its variants. 

We set the return period used by insurers in setting premiums at five years in the 

base case. The return period used by insurers varies between three and 100 years in 

the sensitivity analysis. The shorter return periods would be most relevant in the first 

years after an insurance program is signed into the law, and the law applies to losses 
Modeling Approach and Base-Case Parameters 37

Table 3.6

Major Contagious Disease Incidents Since 1918

Incident Year

Worldwide

Deaths

Measure of 

Transmissibilitya Measure of Severitya

1918 pandemic (H1N1) 1918 50Mb 5 7

Asian flu (H2N2) 1957 1.1Mb 4 4

1968 pandemic (H3N2) 1968 1.0Mb 4 3

SARS 2002 775c NA NA

H5N1 2005 282d NA NA

2007–2008 flu season 2007–2008 NA 2 3

2009 Pandemic (H1N1) 2009 0.4Mb 3 2

MERS 2012 858e NA NA

Ebola 2014 11,325f NA NA

Zika 2015 51g NA NA

COVID-19 2020 3.4Mh 5 4–7

NOTES: Transmissibility is scored on a scale of 1 to 5 and severity is scored on a scale of 1 to 7. NA = not 

available.

a Carrie Reed, Matthew Biggerstaff, Lyn Finelli, Lisa M. Koonin, Denise Beauvais, Amra Uzicanin, 

Andrew Plummer, Joe Bresee, Stephen C. Redd, and Daniel B. Jernigan, “Novel Framework for Assessing 

Epidemiologic Effects of Influenza Epidemics and Pandemics,” Emerging Infectious Diseases, Vol. 19, 

No. 1, January 2013. Preliminary scores for COVID-19 are from André Ricardo Ribas Freitas, Marcelo 

Napimoga, and Maria Rita Donalisio, “Assessing the Severity of COVID-19,” Epidemiologia e Serviços de 

Saúde, Vol. 29, No. 2, April 2020.

b Centers for Disease Control and Prevention, National Center for Immunization and Respiratory 

Diseases, “2009 H1N1 Pandemic (H1N1pdm09 Virus),” webpage, last reviewed June 11, 2019.

c Centers for Disease Control and Prevention, National Center for Immunization and Respiratory 

Diseases, Division of Viral Diseases, “Frequently Asked Questions About SARS,” webpage, last reviewed 

May 3, 2005. 

d Centers for Disease Control and Prevention, National Center for Immunization and Respiratory 

Diseases, “Highly Pathogenic Asian Avian Influenza A(H5N1) Virus,” webpage, last reviewed 

December 12, 2018. 

e These are deaths since 1982. World Health Organization, “Middle East Respiratory Syndrome 

Coronavirus (MERS-CoV),” webpage, undated.

f Centers for Disease Control and Prevention, National Center for Emerging and Zoonotic Infectious 

Disease, Division of High-Consequence Pathogens and Pathology, Viral Special Pathogens Branch, 

“2014–2016 Ebola Outbreak in West Africa,” webpage, last reviewed March 8, 2019. 

g Jaime A. Cardona-Ospina, Valentina Henao-SanMartin, Wilmer F. Acevedo-Mendoza, Katherinn 

Melissa Nasner-Posso, Dayron F. Martínez-Pulgarín, Abril Restrepo-López, Valentina Valencia-Gallego, 

Matthew H. Collins, and Alfonso J. Rodriguez-Morales, “Fatal Zika Virus Infection in the Americas: A 

Systematic Review,” International Journal of Infectious Diseases, Vol. 88, November 2019.

h “The Covid-19 Tracker,” STAT, updated May 19, 2021.
38 Improving the Availability and Affordability of Pandemic Risk Insurance

due to COVID-19 and its variants. The longer return periods are most relevant to a 

time after the current pandemic has passed or if the legislation excludes COVID-19 

and its variants. 

In setting a premium, the federal government might not consider only the best 

available scientific estimates but would presumably also balance coverage affordability with impact on the government budget. Budget impacts would include both the 

direct cost of government-funded claim payments net of premium revenue and the 

indirect reduction in postevent government assistance that would result from lower 

premiums and higher take-up. Analysis of this trade-off is beyond the scope of study.25

When setting the premium for the BCPP, we assume that the government in effect 

uses a 200-year return period. This return period results in a moderate premium in 

the BCPP—a program in which government bears all the risk. In Chubb’s Pandemic 

Re program, “both the insurance industry and the government are paid an appropriate 

risk-adjusted price for pandemic cover.”26 We take this to mean that government will 

follow the private sector in setting rates—and thus assume that the government uses a 

five-year return period in the base case. 

Take-Up Rate

Background

Relevant to the projection of take-up rate for the policies offered by the proposed programs are (1) the percentage of businesses with insurance prepandemic and (2) the percentage of firms with BI coverage. The experts with whom we conferred during this 

study thought that nearly all but the smallest businesses have some type of insurance. 

Insurance is required for loans and lines of credit, and landlords will typically require 

renters to carry property and liability coverage. There is more uncertainty about insurance take-up for microfirms (firms with one or two employees), and, given the large 

number of such firms (see Table 3.4), it is difficult to estimate the take-up rate across 

all firms. 

There is also no systematic information about the percentage of firms with BI 

insurance. Approximately 3.8 million BOPs were in place in 2018.27 BOPs are typically purchased by firms with fewer than 100 employees, and according to the Census 

data, there are about 5.88 million firms with fewer than 100 employees.28 This suggests a substantial take-up rate BI coverage, but, as discussed in Appendix A, there are 

25 See Dixon et al., 2007, for examination of these direct and indirect effects in the context of TRIP.

26 Chubb, 2020, p. 4; italics added.

27 Figures provided to authors by Verisk’s Insurance Services Office via the American Property Casualty Insurance Association.

28 U.S. Census Bureau, 2020.
Modeling Approach and Base-Case Parameters 39

conflicting views about whether firms can and how frequently they do opt out of the 

BI coverage included in the standard BOP.29

Other data suggest that the share of small and medium-sized firms with BI coverage is modest. A survey conducted by Harris Poll Online in 2015 found that only 

34 percent of small U.S. businesses carried BI insurance.30 For the purposes of the poll, 

small firms were defined as those with fewer than 300 employees. However, Harris 

did not report the take-up rates by firm size, making the results difficult to interpret. 

It may also be the case that many businesses, particularly smaller businesses, are not 

fully informed about what their policies cover and might not report that they have BI 

coverage when they actually do. Data from another source showed that 37 percent of 

policies in commercial fire and allied lines included BI coverage in 2018.31 The size 

distribution of firms with policies in this category is unknown, and it is possible that 

these firms could carry other policies as well. 

A potential anchoring point for the likely take-up of pandemic insurance policies is the take-up of terrorism risk insurance coverage, coverage that is subsidized by 

TRIP. TRIP provides an example of what take-up can look like when the premium 

is subsidized, as it is in the proposed pandemic insurance programs. The insurance 

broker Marsh reported that 62 percent of its clients had property policies in 2018 that 

provide terrorism coverage (so called embedded terrorism coverage).32 Marsh clients are 

typically larger firms. The Federal Insurance Office reported that 79 percent of policies contained terrorism coverage in 2019 (this figure appears to include multiple peril 

insurance policies into which terrorism coverage is embedded, as well as stand-alone 

terrorism insurance policies).33 Both these studies consider the proportion of insurance 

policies with terrorism coverage, not the proportion of firms with terrorism coverage. 

One would expect the take-up rate for terrorism or pandemic insurance to be 

driven at least in part by the extent to which the premium is subsidized. More firms 

will likely buy coverage when the premium is low relative to the losses expected by the 

firms. We have not investigated the subsidy rate in TRIP, but for completeness and 

comparison with the projections in Chapter Four, we review the data available on the 

cost of terrorism coverage for certified events in the United States. In cases when the 

policy covers both terrorism and other perils (“embedded policies”), the Federal Insurance Office found that insurers provide terrorism coverage at no additional charge in 

29 Further complicating the situation is the possibility that some small firms may purchase insurance but not a 

BOP and that some firms without employees could purchase a BOP.

30 Businesswire, “Most Small Business Owners at Risk for a Disaster,” August 31, 2015. 

31 Figures provided to authors by Verisk’s Insurance Services Office via the American Property Casualty Insurance Association.

32 Marsh, 2019 Terrorism Risk Insurance Report, New York, May 2019, p. 8.

33 Federal Insurance Office, U.S. Department of the Treasury, Report on the Effectiveness of the Terrorism Risk 

Insurance Program, Washington, D.C., June 2020, p. 29.
40 Improving the Availability and Affordability of Pandemic Risk Insurance

policies accounting for 30 percent of direct earned premium. When terrorism coverage 

adds to the cost of the policy, terrorism coverage accounted for 2.5 percent of the direct 

earned premium in 2019.34 In terms of the price of coverage relative to the amount 

offered, the premium was $0.015 per $1,000 coverage for embedded policies and $0.44 

per $1,000 coverage for stand-alone policies in 2019.35

The developers of the different program proposals have varying expectations for 

the resulting take-up rate. As reported in Chapter Two, Chubb projects that 90 percent 

of small and medium-sized firms will participate in its program and 30 percent of large 

firms. Recall that the program features imply that premiums will be higher for large 

firms per $1,000 of coverage than for the small firms in the Chubb proposal. Zurich 

expects take-up to vary by industry and to average 65 percent across the economy as 

a whole, with premiums at $20 to $30 per $1,000 of coverage. Take-up rates are not 

projected in either the BCPP or the PRIA proposal.

Base-Case Assumptions

We assume that in the BCPP the government will set premium at a level that results 

in fairly widespread take-up. Following the experience with TRIP, we assume that the 

BCPP take-up rate will be 65 percent at the heavily subsidized premium projected for 

the BCPP. 

Price Elasticity of Demand

Previous research does not provide a great deal of direction in setting the elasticity of 

demand for payroll, benefits, and ongoing operating expense coverage. Michel-Kerjan 

and coauthors found that the elasticity of demand for terrorism coverage for businesses with over $1 million in total insured value ranged from –0.11 to –0.25.36 However, their analysis examined the amount of terrorism coverage purchased conditional 

on the purchase of terrorism coverage. In contrast, the elasticity of concern for our 

analysis is the relationship between the percentage change in the number of firms that 

purchase coverage to the percentage change in premiums. Their analysis also excluded 

smaller firms.

Price elasticities in other settings are potentially also relevant. The price elasticity 

of demand for crop insurance by farmers has been found to range from –0.30 to –0.90. 

The insurance purchase decisions of smaller businesses may look more like those of 

34 Federal Insurance Office, U.S. Department of the Treasury, 2020, pp. 20–21.

35 Federal Insurance Office, U.S. Department of the Treasury, 2020, p. 28.

36 Erwann Michel-Kerjan, Paul Raschky, and Howard Kunreuther, “Corporate Demand for Insurance: New 

Evidence from the U.S. Terrorism and Property Markets,” Journal of Risk and Insurance, Vol. 82, No. 3, September 2015, p. 510. An earlier Wharton School study put the price elasticity of demand for the amount of terrorism 

coverage purchased at –0.65. See Howard Kunreuther and Erwann Michel-Kerjan, TRIA and Beyond: Terrorism 

Risk Financing in the U.S., Philadelphia: Wharton Risk Management and Decision Process Center, University of 

Pennsylvania, August 2005, p. 178. 
Modeling Approach and Base-Case Parameters 41

individuals than large businesses, so individual behavior may also be relevant. Estimates of the demand for residential flood insurance vary widely, ranging from –0.62 

to –4.48, and one study put the elasticity of demand for residential hurricane insurance 

at –1.9.37

Previous research suggests that the business demand for insurance is inelastic, 

but the appropriate value when considering pandemic insurance is highly uncertain. 

Considering the range of estimates for terrorism and crop insurance, we set the elasticity of demand for pandemic risk insurance at –0.50 in the base case. This means that 

a 1 percent increase in price induces a 0.5 percent drop in the number of firms that 

purchase pandemic business expense coverage.

Limitations 

We examine the U.S. economy as a whole and do not break our analysis down by economic sector or by insurer size. Our high-level overview of program performance is a 

useful first step and can be viewed as examining average effects across economic sectors 

and types of insurers. Exploring how effects might vary by economic sector would be 

a productive area for further analysis.

We have filled in several gaps in the proposed programs. For example, we have 

assumed that PRIA legislation is written so that the underlying BI policies cover losses 

from contagious disease during a public health emergency even when there is not physical damage to the insured property. We have also assumed that parametric policies 

succeed in sending the right amount of compensation to the firms that need it. It 

remains to be seen whether these issues are resolved in practice. 

Projections on take-up rate for the Chubb and PRIA programs should be interpreted as relative to the take-up rate in the BCPP. Given the extent of the subsidy in 

the BCPP program, expectations of the program proposers, and review of take-up in 

other settings, we assume that take-up in the BCPP would be 65 percent. The take-up 

rates for the other programs are then adjusted from the 65 percent baseline based on 

the relation of their premiums to that predicted for the BCPP. Whether the 65 percent 

take-up rate for the BCPP is realistic will be better understood as more experience is 

developed with pandemic risk insurance.

Finally, there is substantial uncertainty about the appropriate values of many of 

the input parameters. For example, the pandemic return period that insurers use in setting premiums is a fundamental determinant of program outcomes and will depend on 

a range of factors, including whether the program covers losses due to COVID-19 and 

its variants. In the next chapter, program performance is projected under a plausible 

set of base-case parameters, and the analysis provides insights into key factors driving 

37 Michel-Kerjan, Raschky, and Kunreuther, 2015, p. 510.
42 Improving the Availability and Affordability of Pandemic Risk Insurance

performance. However, it should be kept in mind that the base case predicts performance for only one set of parameter values—presumably for a case that is highly plausible. Attention should be paid to how results may differ as parameter values change. 

In Chapter Five, we explore the sensitivity of the outcomes to changes in several key 

parameters.
43

CHAPTER FOUR

Projected Program Performance in the Base Case

In this chapter, we present results for the modeled versions of the BCPP, Chubb, and 

PRIA proposals using the base-case set of parameter values. Importantly, insurers use a 

five-year pandemic return period in the base case. Such an assumption is most appropriate for a pandemic insurance program that applies to COVID-19 and its variants. 

Projections using different return periods are presented in the following chapter. The 

modeled programs are motivated by, but not identical to, the proposed programs. To 

streamline the following presentation, we sometimes refer to the BCPP, Chubb, and 

PRIA approaches simply as BCPP, Chubb, and PRIA, respectively.

Affordability

Affordability for Small and Medium-Sized Firms

The annual premium projected for small and medium-sized firms in the BCPP 

approach is $442 (top panel of Table 4.1). This premium is due to the government 

pricing coverage at levels that ensure widespread take-up, and it assumed that this 

price is sufficiently low to induce 65 percent take-up. The $442 premium results from 

what amounts to the government using a one-in-200-year return period in pricing the 

coverage. 

For comparison, the BCPP premium is low relative to the price of workers’ compensation coverage but high relative to terrorism coverage backstopped by TRIP. 

Once normalized by payroll, the projected premium is $0.98 per $1,000 payroll (see 

Table 4.1). In contrast, workers’ compensation coverage averaged $12.10 per $1,000 

in the United States in 2018.1 The Federal Insurance Office puts the cost of terrorism 

coverage when embedded with other coverage at $0.015 per $1,000 coverage,2 far lower 

than the $2.26 reported in Table 4.1.

1 National Academy of Social Insurance, Workers’ Compensation: Benefits, Coverage, and Costs, Washington, 

D.C., November 2020. 

2 Federal Insurance Office, U.S. Department of the Treasury, 2020, p. 28.
44 Improving the Availability and Affordability of Pandemic Risk Insurance

Table 4.1

Program Performance at Base-Case Parameter Values

Performance Metric

BCPP 

Approach

Chubb 

Approacha PRIA 

Approach

Small and 

MediumSized FirmsLarge 

Firms

All 

Firms

Small and 

Medium-Sized 

Firms

Large 

Firms

All 

Firms

Small and 

MediumSized Firms Large FirmsAll 

Firms

Affordability 

Annual premium per 

insured firm 

$442 $164,000 $986 $1,070 $6.86M $6,580 $1,630 $696,000 $3,950

Total annual premium $1.72Ba $2.13Ba $3.84B $2.67Bb $13.8Bc $16.5B $3.17B $4.52B $7.69Bb

Annual premium per 

$1,000 payroll

$0.98 $0.80 $0.88 $2.38 $34.00 $2.45 $3.62 $3.45 $3.52

Premium per $1,000 

coverage

$2.26 $1.86 $2.02 $5.46 $137 $27.9 $8.32 $7.93 $8.08

Efficacy

Loss for all firms should an 

event occur

$492B $738B $1.23T $492B $738B $1.23T $492B $738B $1.23T

Insured loss for all insured 

firms should an event 

occur

$256B $384B $640B $164B $59.3B $ 242B $128B $192B $320B

Insured loss per insured 

firm should an event occur

$65,800 $29.5M $164,000 $65,800 $29.5M $89,500 $65,800 $29.5M $164,000

Percentage of loss insured 

for firms with insurance

80% 80% 80% 80% 80% 80% 80% 80% 80%

Take-up rate 65% 65% 65% 42% 10% 42% 32% 32% 32%

Percentage of loss insured 52% 52% 52% 33% 8% 18% 26% 26% 26%
Projected Program Performance in the Base Case 45

Performance Metric

BCPP 

Approach

Chubb 

Approacha PRIA Approach

Small and 

MediumSized FirmsLarge 

Firms

All 

Firms

Small and 

Medium-Sized 

Firms

Large 

Firms

All 

Firms

Small and 

MediumSized Firms Large FirmsAll 

Firms

Efficiency

LAE per participating firm 

should an event occur

$2,630 $1.18M $6,560 $2,630 $4.43M $6,190 $9,870 $4.43M $24,600

Annual G&SE per insured 

firm 

$100 $10,000 $133 $100 $10,000 $108 $100 $10,000 $133

Annual capital cost per 

insured firm 

$0 $0 $0 $148 $64,300 $199 $233 $105,000 $582

Risk borne by commercial 

insurers

Insurer-incurred loss and 

LAE should an event occur

Per participating firm $0 $0 $0 $4,110 $1.70M $5,470 $6,480 $2.91M $16,200

Total program $0 $0 $0 $10.3B $3.41B $13.7B $12.6B $18.9B $31.5B

Amount of capital held by 

insurers for solvency risk

Per participating firm $0 $0 $0 $1,640 $714,000 $2,220 $2,590 $1.16 M $6,460

Total program $0 $0 $0 $4.11B $1.44B $5.54B $5.04B $7.56B $12.6B

Insurer share of loss and 

LAE should an event occur

0% 0% 0% 6.0% 5.0% 5.7% 8.6% 8.6% 8.6%

Table 4.1—Continued
46 Improving the Availability and Affordability of Pandemic Risk Insurance

Performance Metric

BCPP 

Approach

Chubb 

Approacha PRIA Approach

Small and 

MediumSized FirmsLarge 

Firms

All 

Firms

Small and 

Medium-Sized 

Firms

Large 

Firms

All 

Firms

Small and 

MediumSized Firms Large FirmsAll 

Firms

Government outlays and 

revenue

Government-incurred loss 

and LAE should an event 

occur

Per participating firm $68,500 $30.7 M $171,000 $64,300 $32.3M $90,200 $69,200 $31.0 M $172,000

Total program $266B $399B $665B $1.61B $64.8B $226B $134B $202B $336B

Annual government 

premium revenue

Per participating firm $342 $154,000 $853 $0 $6.51M $5,230 $0 $0 $0

Total program $1.33B $2.00B $3.33B $0 $13.1B $13.1B $0 $0 $0

a For the initial year of the Chubb program.

Table 4.1—Continued
Projected Program Performance in the Base Case 47

Also relevant in evaluating the magnitude of this premium is the typical price of 

the property and liability coverage purchased by small and medium-sized businesses. 

However, systematic statistics on annual premium are not readily available. In the 

absence of such data, we provide three very rough estimates. First, Insureon reports 

that the average price of a BOP is approximately $1,200 annually for small businesses.3

Insureon does not report the size of the firms in its sample, so it is difficult to compare 

the findings with our projections for firms with fewer than 500 employees. Because 

BOPs provide both property and liability coverage, Insureon’s average price presumably includes both property and liability coverage, but it is unclear whether it includes 

the price of BI coverage.4

Second, NAIC data on direct written premiums for commercial multiperil policies can be used to develop a rough estimate of the price of commercial multiperil 

policies. As shown in Appendix D, direct written premiums in this line (liability and 

nonliability portions combined) averaged approximately $41 billion per year between 

2015 and 2019. Using the same rough estimates of the number of policies written as 

in the “General and Selling Expenses” section of Chapter Three (3.8 to 5.0 million) 

results in a range of $8,200 to $10,800 per policy. Policies in this line are typically held 

by small and medium-sized firms, but again the distribution of firm size in the commercial multiple peril line is unknown. 

Finally, we constructed a rough estimate of the average insurance cost for firms 

with fewer than 500 employees. Using the Insureon data and input from experts with 

whom we conferred during the course of this study, we set the average BOP insurance 

premium (including BI coverage) at $1,200 for firms with fewer than ten employees. 

We then scaled up the premium for larger firm-size categories using average payroll per 

firm and then weighted the results by the number of firms in each firm-size category. 

The average premium across all firms with fewer than 500 employees comes to $4,800 

per firm. 

Considerable uncertainty remains on the average cost of property and liability 

insurance for firms with fewer than 500 employees. But if the average property and 

liability insurance cost for business with fewer than 500 employees falls somewhere 

between $5,000 and $10,000 per firm, the $442 premium for the BCPP would add 

between 4.4 and 8.8 percent to the cost of the coverage. 

The projected annual premium is considerably higher for small and mediumsized firms in the Chubb and PRIA approaches ($1,070 and $1,630, respectively). 

These higher premiums are due in important part to the five-year return period that 

insurers are assumed to use in setting the premium for the portion of the risk that they 

3 Insureon, “How Much Does a Business Owner’s Policy Cost?” webpage, undated-a.

4 When describing business interruption, Insureon says that the cost of adding BI coverage is $500 to $1,000 

per year. See Insureon, “How Much Does Business Interruption Insurance Cost?” webpage, undated-b. 
48 Improving the Availability and Affordability of Pandemic Risk Insurance

bear. As will be discussed in the following section, these higher premiums result in 

much lower take-up rates. 

Affordability for Large Firms

The premiums for large firms are comparable to those for small firms in the BCPP 

and PRIA approaches when normalized by payroll (premium per $1,000 payroll). Due 

to the market-based rate charged for the risk borne by the government, the premium 

charged by Chubb’s Pandemic Re is projected to be much higher ($6.86 million per 

firm and $34 per $1,000 payroll) than in the other two approaches. 

Efficacy

As shown in the “Efficacy” section of Table 4.1, the assistance needed to maintain 

payroll, benefits, and ongoing operating expenses during a 12-month pandemic event 

is constant across modeled programs at $1.23 trillion. Small and medium-sized firms 

purchasing coverage receive $65,800 on average in all three programs, and large firms 

receive $29.5 million. 

The percentage of firms purchasing coverage (take-up rate) varies across the programs because of difference in premium. The BCPP is the reference approach, with 

take-up for both small and medium-sized and large firms assumed to reach 65 percent 

at the premium charged by the program. The higher premium for Chubb’s Pandemic 

Re approach drives its take-up rate down to 42 percent for small and medium-sized 

firms and 10 percent for large firms. Take-up for both firm size categories is projected 

to be 32 percent in PRIA under the base-case parameter assumptions. The take-up 

rates for the PRIA and Chubb approaches should be evaluated relative to the BCPP. 

Multiplying the fraction of losses covered given a firm purchases coverage by the 

take-up rate results in the percentage of the overall $1.23 trillion in event losses covered by the program. At 18 percent, the percentage is lowest for the combined Chubb 

approach, but it is not high for any of the approaches.

Efficiency

There is considerable LAE variation across the approaches, driven by the different 

loss adjustment approaches (see the “Efficiency” section of Table 4.1). LAE per participating firm is lowest for the BCPP, which relies exclusively on parametric policies 

(averaging $6,560 across all participating firms); it is approximately four times higher 

for PRIA, which relies solely on indemnity policies ($24,600 across all participating 

firms). LAE for the combined Chubb approach falls in the middle, with the BEIP for 
Projected Program Performance in the Base Case 49

small and medium-sized firms using a parametric policy and Pandemic Re using an 

indemnity approach. 

The amount of annual G&SE per participating firm differs by firm size but is not 

assumed to vary across approaches. This annual G&SE figure is not large relative to 

LAE when an event occurs, but there are annual recurrences of G&SE, while an LAE 

incurrence happens only when there is a loss.

The approaches also vary considerably in the annual cost of capital per participating firm. There is no capital cost in the BCPP because insurers bear no risk, and we do 

not consider any costs to the government in financing the losses it incurs. Capital costs 

are highest in PRIA ($582 per participating firm), consistent with the relatively high 

amount of risk borne by the commercial insurers in that approach (discussed further 

later in this chapter).

A measure of overall approach efficiency is the ratio of expected annual claim 

payments to total expected annual program costs. Total expected annual program 

costs consist of annual G&SE, annual capital costs, and expected annual claim payments and LAE. A pandemic return period must be assumed to calculate expected 

annual claim payments and expected annual program costs. And given the considerable uncertainty about the return period for a major pandemic, we calculate the efficiency for different pandemic return periods. The pandemic return period can differ 

from the return periods used by insurers and the government in setting premiums, and 

we refer to it as the actual return period. Figures 4.1 and 4.2 show program efficiency 

for small and medium-sized firms and large firms, respectively. As can be seen, the 

BCPP is the most efficient of the three approaches because of the reliance on parametric policies and the absence of a capital cost. Program efficiency hovers around 

95 percent at low return periods and declines gradually for both firm-size categories as 

the actual return period increases because G&SE and capital costs are spread over less 

frequent claim payments. The efficiency of the Chubb and PRIA approaches are lower 

than that of the BCPP, first because both include a capital cost for the risk borne by the 

commercial insurers and second because indemnity policies are used for large firms in 

the Chubb proposal and for all firms in the PRIA proposal.

Although a full assessment of the administrative and loan processing costs of 

the PPP has not been completed, initial information from the PPP provides a useful 

reference point for interpreting the efficiency projections in Figures 4.1 and 4.2. The 

U.S. Small Business Administration paid lenders between 1 and 5 percent in the first 

PPP draw, depending on the loan amount,5 and analysis by the New York Times suggests that processing fees amount to between 2.6 and 4.0 percent of the loan amount.6

5 U.S. Small Business Administration, “Second Updated Paycheck Protection Program Lender Processing Fee 

Payment and 1502 Reporting Process,” Procedural Notice 5000-20091, February 8, 2021.

6 Cowley estimated that banks fees totaled between $13.7 and $20.9 billion on $525 billion in loans. Stacy 

Cowley, “Despite Billions in Fees, Banks Predict Meager Profits on P.P.P. Loans,” New York Times, October 1, 

2020.
50 Improving the Availability and Affordability of Pandemic Risk Insurance

Figure 4.1 

Program Efficiency for Small and Medium-Sized Firms at Base-Case Parameter Values

0

40

30

20

10

50

60

70

80

90

100

Program efficiency (%)

BCPP

Chubb

PRIA

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

Figure 4.2 

Program Efficiency for Large Firms at Base-Case Parameter Values

0

40

30

20

10

50

60

70

80

90

100

Program efficiency (%)

BCPP

Chubb

PRIA

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)
Projected Program Performance in the Base Case 51

The program efficiency for the BCPP is comparable to PPP administrative costs that 

have been measured to date for small and medium-sized firms when the return period 

is shorter than approximately 30 years and for large firms across all return periods 

examined.

Risk Borne by Commercial Insurers

The programs vary greatly in the amount of risk borne by the commercial insurers, 

as measured by loss payments plus LAE incurred by commercial insurers should an 

event occur. No risk is borne by the commercial insurers in the BCPP, compared 

with $13.7 billion and $31.5 billion in Chubb and PRIA approaches, respectively (the 

“Risk Borne by Commercial Insurers” section of Table 4.1).7 The $12 billion industry 

deductible and large LAE are important contributors to the higher insurer outlays in 

PRIA. Nevertheless, insurers bear a relatively small share of loss payments and LAE 

should an event occur, ranging from zero in BCPP to 8.6 percent in PRIA.

The amount of capital that the private sector holds to mitigate solvency risk mirrors the amount of private-sector risk. The cost of this capital is the cost of requiring 

insurers to bear risk. No capital is required for the BCPP, $5.54 billion is required for 

the combined Chubb approach, and $12.6 billion is required for the PRIA approach. 

Recall that the diversifiability index is set to 0.5 in the base case, which means that 

insurers need to hold half as much capital as would be the case if they treated the pandemic coverage as entirely separate from insurance for other hazards. For comparison, 

the surplus of the P&C industry was $867 billion at the end of 2019.8 But this surplus 

covers both commercial and personal insurance lines and includes surplus reported by 

Berkshire Hathaway that covers its noninsurance business. The surplus available for 

commercial lines is on the order of $325 billion once these two factors are considered.9

7 Insurers participating in the BCPP, as well as in the other proposed programs, may face risk that the government will delay or fail to reimburse insurers for claim payments and expenses. Such risk is not considered in this 

analysis.

8 American Property Casualty Insurance Association, “Property Casualty Insurance Industry Suffered LargestEver Drop in Surplus in the First Quarter of 2020,” July 28, 2020.

9 To make this adjustment, the ratio of Berkshire’s surplus for its insurance operations to direct written premium is assumed to be equal to that for the other P&C insurers (0.98). Surplus is then allocated to commercial 

lines based on the ratio of direct written premium for commercial lines to total direct written premium. Calculations are based on data from Verisk’s Insurance Services Office via the American Property Casualty Insurance 

Association. 
52 Improving the Availability and Affordability of Pandemic Risk Insurance

Expected Annual Government Outlays

The last section of Table 4.1 reports government outlays for claim payments and LAE 

should an event occur, as well as projected annual government premium revenue. The 

government receives the premium less G&SE in the BCPP and a large share of the premium in Pandemic Re. The government receives no revenue to offset the risk it bears 

in the Chubb BEIP and PRIA proposals.

Figure 4.3 shows expected annual government net outlays per participating firm 

(expected loss and LAE less premium revenue) for small and medium-sized firms. The 

net outlays per firm turn out to be very similar across all three approaches, even though 

the approaches have very different pricing and risk-sharing approaches. Net government outlays fall as the actual return period lengthens because expected loss and LAE 

fall while the premium the government receives (if any) is not affected by the actual 

return period. 

The programs can be costly to the government. For example, if the actual return 

period is 15 years, the expected annual net government outlays for small and mediumsized firms in the BCPP is approximately $17 billion per year (see Figure 4.4). The lower 

take-up rates for small and medium-sized firms in the Chubb and PRIA approaches 

result in the lower expected annual government net outlays for those programs. 

The projections of net government outlays for large firms in BCPP and PRIA 

follow patterns similar to those for small and medium-sized firms. Because PanFigure 4.3 

Expected Annual Government Net Outlays per Participating Firm for Small and MediumSized Firms at Base-Case Parameter Values

0

5,000

10,000

15,000

20,000

25,000

Expected annual government net outlays

per participating firm ($)

BCPP

Chubb

PRIA

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)
Projected Program Performance in the Base Case 53

demic Re charges a market-based premium and insurers are assumed to use a five-year 

return period in the base case, government net outlays will be negative (government 

runs a surplus) if the actual return period exceeds five years (see Figures 4.5 and 4.6). 

Figure 4.7 reports expected net government outlays for both firm-size categories 

combined. Expected annual net government outlays can be very large when the return 

period is short. For example, if the actual return period is 15 years, the expected annual 

net government outlays for the BCPP is approximately $41 billion per year. For comparison, the PPP lent a total of $718 billion through March 21, 2021, with loans averaging $87,000 across the 8,246,234 loans that were made.10 Care should be taken in 

comparing the PPP figures with the expected annual outlays in Figure 4.7.

Policyholder Subsidy

As shown in Figure 4.8, the premiums for small and medium-sized firms are heavily 

subsidized in all three programs for shorter actual return periods. Subsidies are highest 

in the BCPP approach, followed by Chubb and PRIA. For actual return periods of 30 

years of less, the subsidies for all approaches are considerable. For example, the subsidy 

10 U.S. Small Business Administration, “PPP Data: Find Data and Reports Related to the Paycheck Protection 

Program (PPP),” webpage, undated. 

Figure 4.4 

Expected Annual Government Net Outlays for Small and Medium-Sized Firms at Base-Case 

Parameter Values

0

40

30

20

10

50

60

70

80

90

100

Expected annual government net outlays

($ billions)

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

BCPP

Chubb

PRIA
54 Improving the Availability and Affordability of Pandemic Risk Insurance

Figure 4.5 

Expected Annual Government Net Outlays per Participating Firm for Large Firms at BaseCase Parameter Values

–8

0

–2

–4

–6

2

4

6

8

10

12

Expected annual government net outlays

per participating firm ($ millions)

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

BCPP

Chubb

PRIA

Figure 4.6 

Expected Annual Government Net Outlays for Large Firms at Base-Case Parameter Values

–20

60

40

20

0

80

100

120

140

Expected annual government net outlays

($ billions)

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

BCPP

Chubb

PRIA
Projected Program Performance in the Base Case 55

Figure 4.7 

Expected Annual Government Net Outlays for All Firms at Base-Case Parameter Values

–50

150

100

50

0

200

250

Expected annual government net outlays

($ billions)

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

BCPP

Chubb

PRIA

Figure 4.8 

Policyholder Subsidy for Small Firms

–60

–20

–40

0

20

40

60

80

100

Percentage of program costs subsidized

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

BCPP

Chubb

PRIA
56 Improving the Availability and Affordability of Pandemic Risk Insurance

for the BCPP at a 30-year return period is 81 percent, which means that the full cost of 

the program (for which small and medium-sized firms pay $442) is $2,330.11 Subsidies 

decline and ultimately disappear as the actual return period increases. For example, the 

subsidy in the Chubb approach for small and medium-sized businesses disappears once 

the return period reaches approximately 85 years.

For large firms, the findings on subsidies are similar to those for small and 

medium-sized firms for the BCPP and PRIA approaches (see Figure 4.9). Subsidies 

occur in Chubb’s Pandemic Re only if the actual return period turns out to be less than 

the five years that insurers are assumed to use in the base case when setting premiums.

Discussion

The relative performance of each of the modeled programs under the base-case parameter assumptions is summarized in Table  4.2. For small and medium-sized firms, 

BCPP performs best in terms of affordability, efficacy, and efficiency. PRIA does the 

best in terms of expected annual net government outlays and policyholder subsidy. It 

also does best in terms of risk borne by commercial insurers, assuming that best in this 

context means the most risk borne by commercial insurers. For large firms, the BCPP 

again performs best in terms of affordability, efficacy, and efficiency. PRIA still trans11 Program costs = premium/(1 – subsidy).

Figure 4.9 

Policyholder Subsidy for Large Firms

–1,600

–300

–400

–500

–600

–700

–800

–900

–1,000

–1,100

–1,200

–1,300

–1,400

–1,500

–200

–100

0

100

Percentage of program costs subsidized

0 10 20 30 40 50 60 70 80 90 100

Actual return period (years)

BCPP

Chubb

PRIA
Projected Program Performance in the Base Case 57

fers the most risk to commercial insurers, but the Chubb approach now generates the 

lowest expected annual government net outlays and policyholder subsidy. 

The greater efficiency of the BCPP and the ability of the government to price coverage using a much longer return period than the private sector results in the BCPP’s 

lower premium. Although the $442 premium projected for small and medium-sized 

firms in the BCPP seems modest, it remains to be seen whether 65 percent of firms 

would buy coverage at this rate, as assumed in the base case. Very rough calculations 

suggest that premiums at this level could increase the cost of commercial multiperil 

policies on the order of 4.4 to 8.8 percent. Some firms may be reluctant to purchase 

coverage at these rates, remembering the large government-funded PPP.

None of the programs does a particularly good job in terms of the percentage 

of losses reimbursed over a six-month pandemic (efficacy). This is largely because of 

the moderate to low take-up rates and the policyholder co-pay. The BCPP does best 

because its lower premium results in the highest take-up rate. Take-up and the percentage of losses reimbursed for the large firms in Chubb’s Pandemic Re proposal are particularly low. Large firms presumably have a better ability to weather revenue declines 

than smaller firms, but the fact remains that large firms account for 60 percent of 

payroll at firms with employees, and their financial health will have important consequences for overall employment levels during a pandemic.

Program efficiency as we have defined it is driven by G&SE, LAE, and privatesector capital costs. The BCPP does best on this metric partly because it relies on parametric policies to reduce costs and to address the practical problem of simultaneously 

adjusting an enormous number of claims. The BCPP also fares best in part because 

it does not require insurers to hold capital to protect against solvency risk. The cost 

of such capital is the cost of transferring risk from the public to commercial insurers. 

Table 4.2

Ranking of Modeled Programs by Program Metric at Base-Case Parameter Values

Program Metric

Small and Medium-Sized Firms Large Firms

BCPP 

Approach

Chubb 

Approach

PRIA 

Approach

BCPP 

Approach

Chubb 

Approach

PRIA 

Approach

Affordability Most Mid Least Most Least Mid

Efficacy Highest Mid Lowest Highest Lowest Mid

Efficiency Highest Mid Lowest Highest Mid Lowest

Risk borne by commercial 

insurers

Least Mid Most Least Mid Most

Expected annual net 

government outlays

Highest Mid Lowest Highest Lowest Mid

Policyholder subsidy Most Mid Least Most Least Mid

NOTE: Shading indicates the program that performs best on the metric.
58 Improving the Availability and Affordability of Pandemic Risk Insurance

Higher capital costs reduce efficiency but are associated with lower government outlays 

should an event occur and with other potential benefits that come with greater privatesector skin in the game. These other potential benefits include greater concern about 

fraudulent claims and the development of the expertise and experience needed to grow 

the private sector’s ability to write pandemic risk. When deciding whether to proceed 

with a pandemic risk insurance program, program efficiency should be compared with 

that of other approaches, such as the PPP. We found the efficiency of the BCPP compares favorably with the administrative costs of the PPP, but unless pandemic return 

periods are short, efficiencies of the other programs do not compare favorably. 

As shown in Table 4.2, the amount of risk borne by commercial insurers is highest in PRIA but, reflecting the difficulty of insuring pandemic risk, is not particularly 

high in any of the programs. Chubb proposes that the insurer risk share double over 

time—but even so, it will remain modest. One advantage of the insurer deductible 

in the PRIA approach is that the share of losses borne by insurers would be higher in 

smaller or better-contained pandemics. The capital required to hedge solvency risk is 

not large relative to industry surplus for the Chubb and PRIA approaches (3.8 percent 

of an estimated $325 billion for commercial lines), but further analysis is required to 

determine how difficult it would be for the industry to raise this amount of capital.

Illustrating the usual trade-off between affordability and government cost, the 

BCPP approach does best on affordability but worst on expected government annual 

net outlays and policyholder subsidy. Our measure of government net outlays consists 

of only the direct revenues and outlays of the program. As discussed in Chapter Two, 

indirect costs, such as an increased demand for government assistance during an event 

when there is limited insurance coverage, should also be considered when assessing the 

full effect of a pandemic insurance program on overall government outlays. Such an 

analysis is beyond the scope of this study, but the amount of risk borne by commercial 

insurers is likely a better indicator of overall net government outlays than direct government outlays through the pandemic insurance program.

As apparent from Table 4.2, no approach as currently proposed dominates the 

others on all the performance metrics. Rather, each has advantages and disadvantages 

in terms of the performance metrics examined.
59

CHAPTER FIVE

Sensitivity of Projections to Changes in Parameter Values

There is considerable uncertainty over the appropriate values for many of the parameters that underlie the projections in the base case. In this chapter, we examine the 

sensitivity of the results to changes in the input parameters. 

Approach

We examined the sensitivity of the results by varying the eight input parameters in 

Table 5.1. Plausible ranges are selected for each parameter based on the information 

collected during the study. 

We assumed in the base case that insurers would use a five-year pandemic return 

period in pricing the risk that they bear. This short return period would be most relevant if the insurance program applies to COVID-19 and its variants. If the insurance 

program excludes COVID-19 and its variants, insurers may price coverage assuming a 

longer return period. Chubb, for example, excludes COVID-19 and its variants from 

Table 5.1

Range of Parameter Values Used in Sensitivity Analysis

Parameter 

Value Used in Baseline 

Projections Plausible Range

Pandemic return period used by insurers in pricing 5 years [3, 100]

G&SE for small and medium-sized firms $100 [$50, $200]

G&SE for large firms $10,000 [$5,000, $20,000]

LAE ratio for parametric policies 0.04 [0.02, 0.06]

LAE ratio for indemnity policies 0.15 [0.010, 0.200]

Demand elasticity –0.50 [–0.75, –0.25]

Diversifiability index 0.50 [0.25, 0.75]

Rate of return on capital 9% [6%, 12%]
60 Improving the Availability and Affordability of Pandemic Risk Insurance

its proposed program and assumes a 30-year return period in its pricing.1 Given the 

key role that the return period plays in determining the premium and uncertainty over 

whether Congress will require a pandemic insurance program to cover COVID-19 

and its variants, we first provide a detailed analysis of the sensitivity of the outcomes to 

changes in the return period. 

For each of the other seven parameters in Table 5.1, we project outcomes by setting the parameter at the minimum and the maximum of the plausible range and 

holding other parameters at base-case values. The resulting range of projections is then 

reported for four key outcomes: premium and take-up for small and medium-sized 

firms, premium and take-up for large firms, amount of capital held by insurers, and 

expected annual net government outlays. Probabilities are not associated with particular parameter values or the resulting outputs. Rather, this analysis illustrates the sensitivity of the results to the underlying parameters.

Finally, we examine the sensitivity of the results to change in the assumption 

regarding whether the government will reimburse insurers for LAE on the part of the 

claim payments it funds. Motivated by TRIP’s decision to include LAE in insured loss, 

we assumed in the base case that the government would cover LAE for its portion of 

claim payments. The alternative examined in this chapter assumes that insurers will be 

responsible for all LAE in the Chubb and PRIA approaches. Because insurers bear no 

risk in the BCPP, we assume that the government continues to reimburse insurers for 

all LAE in that program.

Sensitivity of Results to Changes in Return Period Used by Insurers in 

Pricing

The projected annual premium for small and medium-sized firms in the Chubb and 

PRIA approaches varies considerably as the return period changes (see Figure  5.1). 

Note that the BCPP premium does not change as the return period varies because no 

risk is borne by insurers in the BCPP, so the return period that insurers use in pricing is 

immaterial. The base-case results can be read off Figure 5.1 using the five-year return 

period. Some stakeholders with whom we conferred thought that insurers might use 

an even shorter return period if the program applies to COVID-19, and the substantially higher premium that would result from a three-year return period is shown in 

Figure 5.1 (first dot plotted from the left for each program). For example, small and 

medium-sized firms would pay $2,760 under PRIA if insurers use a three-year return 

period versus $1,630 in the base case. If insurers use a 30-year return period, the premiums in all three programs are quite close for small and medium-sized firms. 

1 State insurance regulators could potentially resist the use of such longer return periods, fearing that these 

longer returns could jeopardize insurer solvency.
Sensitivity of Projections to Changes in Parameter Values 61

Because Pandemic Re uses a market-based rate for the risk borne by both insurers 

and the government, the premium for large firms in Pandemic Re remains considerably higher than in the BCPP and PRIA approaches over a wide range of return periods 

(see Figure 5.2). Even with a return period of 30 years, the premium for large firms is 

$1.22 million in the Chubb approach versus $164,000 and $190,000 in the BCPP and 

PRIA approaches, respectively. Only for very long return periods do the premiums of 

all three programs converge. These results show the challenges of using the Pandemic 

Re approach for large firms if the program applies to COVID-19 and its variants.

The effect of return period on take-up rates mirrors the patterns in Figures 5.1 

and 5.2. In the base case, take-up rates for the Chubb and PRIA approaches are much 

lower than for the BCPP (see the results for the five-year return period in Figure 5.3). 

However, once the return period equals 30 years, the take-up rates for small and 

medium-sized firms are similar in all three approaches. The take-up rate for large firms 

in the Chubb approach remains substantially below that in the BCPP for all return 

periods considered. 

The amount of capital that insurers hold to protect against solvency risk rises 

considerably as the return period increases (see Figure 5.4). For both the Chubb and 

PRIA approaches, the amount of capital approximately doubles as the return period 

that insurers use in setting premiums rises from five years to 30 years. The amount of 

capital increases because the annual premium across all participating firms falls as the 

Figure 5.1 

Premium for Small and Medium-Sized Firms as Pandemic Return Period Used by Insurers 

Varies

0

2,000

1,500

1,000

500

2,500

3,000

Annual premium per firm ($)

0 10 20 30 40 50 60 70 80 90 100

Return period used by insurers in setting premium (years)

BCPP

Chubb

PRIA
62 Improving the Availability and Affordability of Pandemic Risk Insurance

Figure 5.2 

Premium for Large Firms as Pandemic Return Period Used by Insurers Varies

0

8

6

4

2

10

12

Annual premium per firm ($ millions)

0 10 20 30 40 50 60 70 80 90 100

Return period used by insurers in setting premium (years)

BCPP

Chubb

PRIA

Figure 5.3 

Take-Up Rate as Return Period Used by Insurers Varies

0

30

20

10

40

50

60

70

80

90

Take-up rate (%)

0 10 20 30 40 50 60 70 80 90 100

Return period used by insurers in setting premium (years)

BCPP (small, medium, and large firms)

Chubb (small and large firms)

PRIA (small, medium, and large firms)

Chubb (large firms)

NOTE: The take-up rates for small and medium-sized firms and large firms are the same in the BCPP; the 

same is true for PRIA. 
Sensitivity of Projections to Changes in Parameter Values 63

return period increases,2 increasing the gap between the loss that insurers plan for and 

the annual premium collected (see Appendix C for a discussion of planning loss).

Finally, expected annual government net outlays in the Chubb and PRIA 

approaches increase considerably as the return period grows (see Figure 5.5). Expected 

annual government outlays in Figure  5.5 are calculated assuming an actual return 

period of 30 years and cover all firm sizes. Expected annual government net outlays in 

the Chubb approach remain below those for PRIA across the range of return periods 

examined and approaches those for the BCPP for long return period. When the return 

period used by insurers in setting premiums is sufficiently below the assumed 30-year 

actual return period, the Chubb approach generates a government surplus. 

Sensitivity of Results to Changes in Other Parameters

Table 5.2 summarizes the sensitivity of the results to variation in the other parameters 

listed in Table 5.1. The projection when the parameter is set at the left end of the interval examined is reported as the left-hand number in each bracket, and the projection 

when the parameter is set at the right end of the interval examined is reported as the 

right-hand number in each bracket. Outcomes that are particularly sensitive to variation of the parameter over the range examined are shaded.

2 This result is a consequence of the inelastic demand curve.

Figure 5.4 

Capital Help by Insurers as Return Period Used by Insurers Varies

0

15

10

5

20

25

30

Capital held by insurers ($ billions)

0 10 20 30 40 50 60 70 80 90 100

Return period used by insurers in setting premium (years)

BCPP

Chubb

PRIA
64 Improving the Availability and Affordability of Pandemic Risk Insurance

Overall, the outcomes are not particularly sensitive to variation of each parameter over its plausible range, holding other parameters at their base-case values. For 

example, varying the LAE ratio for parametric policies between 0.02 and 0.06 does not 

cause large changes in the outcome of the BCPP and Chubb approaches (PRIA does 

not use a parametric policy). However, some outcomes are quite sensitive to some of 

the parameters examined. Because of its low value in the base case, varying the G&SE 

for small and medium-sized firms between $50 and $200 causes considerable proportionate change to the premium in the BCPP, with consequent large effect on the takeup rate. The demand elasticity also has a considerable impact on the outcomes for the 

Chubb and PRIA approaches, and the diversifiability index has considerable impact on 

the amount of capital held by insurers in the Chubb and PRIA approaches. 

The results of this sensitivity analysis suggest areas in which further work to 

narrow uncertainty over likely parameter values would be most useful.

Sensitivity of Results to Change in Assumption on Whether 

Government Pays Loss Adjustment Expenses

The first set of rows in Table 5.3 reproduces the base-case results in which the government reimburses insurers for the LAE on the portion of the loss it funds. The second 

Figure 5.5 

Expected Annual Government Net Outlays for All Firms as the Return Period Used by 

Insurers Varies

–15

15

10

5

0

–5

–10

20

25

30

Expected annual net government outlays

($ billions)

0 10 20 30 40 50 60 70 80 90 100

Return period used by insurers in setting premium (years)

NOTE: Assumes an actual pandemic return period of 30 years.

BCPP

Chubb

PRIA
Sensitivity of Projections to Changes in Parameter Values 65

Table 5.2

Sensitivity of Program Outcomes to Changes in Parameter Values

Parameter 

[parameter 

range]

Small and 

Medium-Sized Firms Large Firms All Firms

Premium 

($ per firm)

Take-Up 

Rate (%)

Premium 

($1,000 per 

firm)

Take-Up 

Rate (%)

Amount of 

Capital Held 

by Insurers 

($ billions)

Expected 

Annual 

Government 

Net Outlays 

($ billions)a 

G&SE for small 

firms and mediumsized firms 

[$50, $200]

BCPP [382, 542] [69, 59] [164, 164] [65, 65] [0, 0] [19.1, 17.8]

Chubb [1,260, 1,410] [38, 36] [6,860, 6,860] [10,10] [6.16, 5.90] [–4.84, –5.17]

PRIA [1,580, 1,740] [33, 32] [694, 701] [33, 32] [12.7, 12.5] [11.2, 10.9]

G&SE for large 

firms [$5,000, 

$20,000]

BCPP [442, 442] [65, 65] [159, 173] [65, 62] [0, 0] [18.8, 18.3]

Chubb [1,311, 1,311] [38, 38] [6,860, 6,870] [10, 10] [6.06, 6.08] [–4.96, –4.95]

PRIA [1,630, 1,630] [33, 32] [690, 708] [33, 32] [12.6, 12.6] [11.1, 11.0]

LAE ratio for 

parametric policies 

[0.02, 0.06]

BCPP [436, 349] [65, 65] [161, 166] [66, 65] [0, 0] [18.4, 18.8]

Chubb [1,290, 1,330] [38, 37] [6,860, 6,860] [10, 10] [6.02, 6.12] [–5.02, –4.89]

PRIA [1,630, 1,630] [32, 32] [696, 696] [32, 32] [12.6, 12.6] [11.1, 11.1]

LAE ratio for 

indemnity policies 

[0.10, 0.20]

BCPP [442, 442] [65, 65] [164, 164] [65, 65] [0, 0] [18.6, 18.6]

Chubb [1,311, 1,311] [38, 38] [6,570, 7,160] [10, 10] [6.04, 6.10] [–4.71, –5.19]

PRIA [1,524, 1,710] [33, 32] [659, 734] [33, 32] [12.2, 13.0] [10.9, 11.3]

Demand elasticity 

[–0.25, –0.75]

BCPP [442, 442] [65, 65] [164, 164] [65, 65] [0, 0] [18.6, 18.6]

Chubb [1,311, 1,311] [50, 29] [6,860, 6,860] [25, 4] [9.73, 4.09] [–20.0, –0.260]

PRIA [1,428, 2,080] [48, 19] [606, 898] [48, 19] [16.0, 9.56] [16.4, 6.33]
66 Improving the Availability and Affordability of Pandemic Risk Insurance

set of rows presents the results when insurers are responsible for all LAE, regardless 

of what part of overall claim payments are funded by the government. Because insurers bear no risk in the BCPP, we assume that the government continues to reimburse 

insurers for all LAE in that program.

Requiring insurers to bear all LAE has a substantial impact on premium and takeup for small and medium-sized firms. For example, premium in the Chubb approach 

for small and medium-sized firms rises from $1,070 to $1,650, and the take-up rate 

falls from 42 percent to 34 percent. The effect on large firms is also considerable in 

PRIA, although the effect is minimal in Chubb’s Pandemic Re approach because the 

premium is already at a market-based rate. Capital held by insurers to protect against 

solvency risk roughly doubles if the insurers bear all LAE. In contrast, government net 

annual outlays fall as more of the overall program costs are passed to the private sector. 

Parameter 

[parameter 

range]

Small and 

Medium-Sized Firms Large Firms All Firms

Premium 

($ per firm)

Take-Up 

Rate (%)

Premium 

($1,000 per 

firm)

Take-Up 

Rate (%)

Amount of 

Capital Held 

by Insurers 

($ billions)

Expected 

Annual 

Government 

Net Outlays 

($ billions)a 

Diversifiability index 

[0.25, 0.75]

BCPP [442, 442] [65, 65] [164, 164] [65, 65] [0, 0] [18.6, 18.6]

Chubb [1,400, 1,220] [36, 39] [6,900, 6,830] [10, 10] [8.91, 3.11] [–5.19, –4.70]

PRIA [1,780, 1,490] [31, 34] [763, 632] [31, 34] [18.4, 6.48] [10.6, 11.7]

Rate of return on 

capital [0.06, 0.12]

BCPP [442, 442] [65, 65] [164, 164] [65, 65] [0, 0] [18.6, 18.6]

Chubb [1,250, 1,370] [39, 37] [6,840, 6,890] [10, 10] [6.16, 5.98] [–4.79, –5.12]

PRIA [1,530, 1,730] [34, 32] [653, 740] [34, 32] [12.8, 12.4] [11.5, 10.8]

NOTES: Outcomes particularly sensitive to variation of the specified parameter over its plausible range 

are shaded. 

a Assumes actual pandemic return period of 30 years.

Table 5.2—Continued
Sensitivity of Projections to Changes in Parameter Values 67

Table 5.3

Sensitivity of Program Outcomes to Change in Assumption on Whether Government Pays 

Loss Adjustment Expenses

Assumption 

Small and 

Medium-Sized Firms Large Firms All Firms

Premium ($ 

per firm)

Take-Up 

Rate (%)

Premium 

($ per firm)

Take-Up 

Rate (%)

Amount of 

Capital Held 

by Insurers 

($ billions)

Expected 

Annual 

Government 

Net Outlays 

($ billions)a 

Government pays 

LAE on its portion 

of claim payments

BCPP $442 65% $164,000 65% $0 $18.7

Chubb $1,070 42% $6.86M 10% $5.54 –$5.59

PRIA $1,630 32% $696,000 32% $12.6 $11.1

Government does 

not pay LAE on its 

portion of claim 

payments

BCPP — — — — — —

Chubb $1,650 34% $7.06M 10% $11.1 –7.33 

PRIA $2,330 20% $1.01M 20% $20.6 $5.90

a Assumes actual pandemic return period of 30 years.

69

CHAPTER SIX

Conclusion 

Several programs have been proposed to expand the availability of insurance for business revenue declines due to pandemic-induced business closures or restrictions on 

business activity. These programs seek to keep employee paychecks coming during 

a pandemic and to cover the ongoing operating expenses needed for firms to survive 

until the pandemic passes. The programs differ in several key dimensions, including 

the amount of risk borne by commercial insurers, the approach to paying claims, the 

extent to which the U.S. government receives a premium for the risk it bears, and the 

extent of policyholder subsidies.

The programs all leverage the deep capability of the commercial insurance industry to place policies and adjust claims. The programs all seek to define benefits and 

the benefit distribution mechanism in advance rather than rely on programs hastily 

crafted after an event occurs. 

The programs were modeled and performance characterized in the following 

dimensions:

• efficacy

• efficiency

• affordability

• risk borne by commercial insurers

• expected annual government outlays

• extent of policyholder subsidy.

For small and medium-sized firms, the BCPP approach performs best in terms of 

affordability, efficacy, and efficiency. The PRIA approach does the best in terms of 

expected annual net government outlays and policyholder subsidy. It also does best in 

terms of risk borne by commercial insurers, assuming that best in this context means 

the most risk borne by commercial insurers. For large firms, the BCPP again performs 

best in terms of affordability, efficacy, and efficiency. PRIA still transfers the most risk 

to commercial insurers, but the Chubb approach now generates the lowest expected 

annual government net outlays and policyholder subsidy. Projected outcomes are sensitive to a number of underlying model parameters, about which there is considerable 
70 Improving the Availability and Affordability of Pandemic Risk Insurance

uncertainly. In particular, the pandemic return period that insurers used in pricing 

coverage has an important impact on premium and take-up in the Chubb and PRIA 

approaches, with the return period used in pricing depending importantly on whether 

the program applies to COVID-19 and its variants. 

This analysis provides information useful to assessing the advantages and disadvantages of different approaches for improving the availability and affordability of pandemic risk insurance. However, it does not seek to evaluate and compare the full range 

of policy options for addressing pandemic losses. Such a policy analysis would systematically compare the advantages and disadvantages of an insurance-based approach 

with a government-based approach, such as the PPP. It would also take a more comprehensive view of some of the outcome measures used in this analysis. For example, 

in this report we have projected government net outlays directly through the proposed 

programs, but a more comprehensive analysis would include the indirect effects of the 

program on other government outlays.

The various proposals that we have examined contain several important gaps that 

remain to be filled—for example, 

• whether and how the parametric trigger would address firms either subject to a 

partial shutdown order or that experience substantial revenue decline but are not 

subject to a closure order 

• whether policies backed by PRIA will provide coverage for pandemic losses when 

the underlying BI policies require physical damage to the insured property 

• whether parametric policies will result in some firms receiving more compensation than they need and others less (basis risk).

In this analysis, we have in effect assumed that gaps are filled in that result in the right 

amount of assistance getting to the right firms, but additional work is needed to flesh 

out the proposals to deal with these and other gaps and to determine the extent to 

which unaddressed issues can be resolved. 
71

APPENDIX A 

Overview of Business Interruption Policies

BI insurance, also known as business income and extra expense insurance, covers net 

income that would have been earned during the period of interruption plus continuing 

normal operating expenses.1 The provisions of the BI policies can vary, and the following overview attempts to characterize the policies typically held by small and mediumsized businesses.2

BI coverage is typically tied to a property policy. It is included in the standard 

BOP and is primarily designed to cover loss of business income due to suspension of 

operations caused by direct physical damage to the covered property. The physical 

damage must be caused by a hazard covered by the policy (a covered cause of loss).3 The 

policy covers net income (profit) that would have been earned or incurred if no physical loss or damage had occurred, as well as continuing normal operating expenses. Coverage applies during the period required to repair the damaged property or to find a new 

location, up to 12 consecutive months.

Continuing normal operating expenses include such items as rent, loan payments, 

utilities, and payroll.4 However, the standard policy does not treat the payroll of all 

employees the same. Payroll for officers, executives, managers, employees under contract, and other specified job classes are covered for up to 12 consecutive months. 

These are generally employees with hard-to-replace skills. Payroll for everyone else 

is referred to as ordinary payroll, and ordinary payroll is covered for 60 days in the 

standard policy. There was disagreement among the experts with whom we conferred 

during the course of this study about how frequently firms that purchase property 

insurance have BI coverage. Some maintained that there are limited options to opt out 

1 Elsewhere in the report we use the term business revenue rather than business income and do not distinguish 

between the two terms. 

2 This overview is based in part on Insurance Services Office, Businessowners Coverage Form, BP 00 03 01 10, 

2009. 

3 Insurance Services Office, 2009. 

4 In this report, ongoing operating expenses refers to that part of normal operating expenses other than payroll 

and benefits.
72 Improving the Availability and Affordability of Pandemic Risk Insurance

of the BI coverage included in the standard BOP. Others said that small businesses in 

the United States typically opt out of ordinary payroll coverage.

Continuing normal operating expenses are not explicitly defined in the standard 

policy, which is one of the reasons that business income losses are more costly to adjust 

than losses in many other lines of insurance. 

There is typically no dollar limit on this time-based coverage. All losses (other 

than ordinary payroll) in the 12-month period following the physical damage are covered even if the 12-month period extends beyond the end of the policy period. What is 

more, the 12-month period resets for each loss. Thus, a firm with a nine-month closure 

due to property damage at the beginning of the policy period and a 12-month closure 

due to property damage on the last day of the policy period could receive payment for 

income losses over 21 months. There is also no waiting period before coverage applies 

(except for the civil authority coverage). 

Loss of business income due to actions of a civil authority is also covered in the 

standard BOP, but not nearly to the same extent as losses due to the suspension of 

operations caused by physical damage to the insured property. Coverage applies when 

the insured property is in the area closed because of the incident and no more than one 

mile from the damaged property. Coverage typically begins 72 hours after the closure 

and applies for four consecutive weeks following the closure. 
73

APPENDIX B

Insurance Payments in a Partial Shutdown

This appendix shows how much of a parametric payout a firm would need to return 

(or reserve for future use) during a partial shutdown. The analysis assumes that firms 

are not reimbursed for lost profits and are provided with enough income to maintain 

payroll and benefits at preshutdown levels and to cover ongoing operating expenses 

postshutdown. 

Monthly firm revenue preshutdown is the sum of the following components:

I0= π0+ PBOE0 + VC0,

where

I0 =monthly income preshutdown

π0 = monthly firm profit preshutdown

PBOE0 = monthly payroll, benefits, and ongoing operating expenses preshutdown

VC0 = monthly firm variable costs preshutdown.

When a shutdown occurs, the firm receives a parametric insurance payment equal 

to preshutdown payroll, benefits, and ongoing operating expenses. The firm monthly 

income postshutdown is thus 

I1R= I1 + PBOE0,

where

I1R= postshutdown income received, including insurance payout

I1 = income postshutdown without insurance payment and 0 ≤ I1 < I0.
74 Improving the Availability and Affordability of Pandemic Risk Insurance

To maintain payroll, benefits, and ongoing operating expenses postshutdown, the 

firm needs the following income: 

I1N = PBOE0+ VC1,

where

I1N = monthly income needed to maintain preshutdown payroll and benefits 

and to support postshutdown ongoing expenses

VC1 = monthly variable costs required to support postshutdown level of production.

The firm makes zero profit in this situation.

Subtracting the amount of income needed from the amount of income received 

postshutdown results in the amount of the insurance payment that is returned or 

reserved for future use: 

Amount of the insurance payment returned = 

0 whenVC1 > I1

I1VC1 when I1PBOE0 <VC1C < I1

PBOE0 whenVC1 < I1PBOE0.


















75

APPENDIX C

Pandemic Risk Insurance Model

In this appendix, we provide the equations used to calculate the model outputs listed 

in Table 3.2. Table C.1 defines the parameters used in the equations. 

Table C.1 

Parameter Definitions

Parameter Definition

event_loss Reduction in payroll, benefits, and revenue needed to cover ongoing costs 

due to the pandemic

eligible_firms Number of firms eligible to participate in program

covered_costs_per_month Payroll, benefits, and ongoing operating expenses covered by the policy in 

dollars per month 

dindex The diversifiability index factor, which captures the extent that insurers can 

use surplus held for other types of hazards to reduce the amount of capital 

they need to support pandemic risk policies

months_coverage Months of costs provided by policy 

pholder_deductible The amount of loss absorbed by the policyholder before insurance 

payments begin

pholder_copay Proportion of loss after waiting period that is not covered by the insurance 

payment

program_cap Maximum aggregate claim payments allowed under the program

insurer_deductible The amount of claim payments that must be paid by commercial insurers 

before government claim payments begin

insurer_copay Proportion of claim payments above insurer deductible that is paid by 

commercial insurers

ror Rate of return required on the capital that commercial insurers hold for 

solvency risk

event_prob The pandemic return periods that commercial insurers or the government 

use in pricing coverage; the return period used by insurers can differ from 

that used by government

lae_ratio Ratio applied to claim payments to calculate LAE

takeup Proportion of eligible firms that purchase coverage
76 Improving the Availability and Affordability of Pandemic Risk Insurance

The number of firms participating in the program is

participating _ firms = eligible _ firms *takeup.

The number is calculated separately for small and medium-sized and large firms.

The maximum amount of loss covered by the policy is

policy _limit = covered _costs _ per _month *months _coverage.

Losses that occur any time during the policy period are covered up to the policy limit. 

The policy limit for Pandemic Re is the $50 million dollar limit prescribed in the 

Chubb’s proposal multiplied by the number of participating firms.

The amount of loss that is insured should an event occur is 

insured _loss =

min(takeup *( ) event _loss  pholder _ deductible * 1( )  pholder _copay ,

takeup *( ) policy _limit  pholder _ deductible * 1( )  pholder _copay ,

program_cap).

The amount of insured loss incurred by insurers should an event occur is

govt _claims = insured _loss insurer _claims.

LAE = insured _loss * LAE _ratio.

G&SE = $100 for small and medium-sized firms

$10,000 for large firms













.

insurer _ claims =

insured _loss if  insured _loss insurer _ deductible

insurer _ deductible +insurer _copay *(insured _loss insurer _ deductible)

if insured _loss >insurer _ deductible.



















(C.1)

(C.2)

(C.3)

(C.4)

(C.5)

(C.6)

(C.7)
Pandemic Risk Insurance Model 77

The insurance industry’s cost of bearing pandemic risk includes the cost of the 

capital needed to ensure, with a given probability, that insurers have sufficient resources 

to finance claim payments. The planning probabilities that insurers are thought to use 

in making this decision are high—99 percent or higher.1 For this analysis, we have 

assumed that a pandemic is a dichotomous random variable and that insurers plan for 

an event that is of the same magnitude as the current event. The planning loss (ploss) in 

this case is thus insurer claims plus LAE should a pandemic occur plus G&SE.

ploss = insurer _claims * 1( ) + LAE _ratio .

In PRIA and Chubb’s BEIP, the insurers retain all the premium and thus

capital =( ) 1dindex *( ) ploss ( ) premiumG&SE ror *capital .

In Pandemic Re, insurers receive only a part of the premium, which will be 

addressed below. 

Rearranging C.9 yields

capital = ploss  premium+G&SE

 ,

where 

 

 = 1

1dindex ror

 0 dindex <1.

Premium is the sum of expected annual loss, expected annual LAE, G&SE, and 

the costs of capital required to hedge solvency risk:

premium = event _ prob *insurer _claims * 1( ) + LAEratio +G&SE +ror *capital ,

where event_prob is the event probability used by the agent (either insurers or the government) in setting premium. Substituting C.10 into C.11 and rearranging yields the 

following for the PRIA program:

1 Dixon et al., 2007, p. 17. 

(C.8)

(C.9)

(C.10)

(C.11)
78 Improving the Availability and Affordability of Pandemic Risk Insurance

premiumPRIA =

Because no capital is required by the BCPP and all claims are funded by the 

government,2 the premium calculation for the BCPP simplifies to

premiumBCPP =G&SE +event _ prob *insured _loss * 1( ) + LAE _ratio .

Equation C.12 is also used to calculate the premium for Chubb’s BEIP for small 

and medium-sized firms. 

Insurers retain only a portion of the premium in Pandemic Re, and we assume 

that insurers also retain the amount needed to cover their annual G&SE:

premium retained by insurersPanRe = industry _copay * premium+

( ) 1industry _copay *G&SE .

premium ceded to govtPanRe =( ) 1industry _copay *( ) premiumG&SE .

We combine C.14a, C.10, and C.11 and recognize that the premium in Pandemic 

Re is set at a market-based rate that covers the risk borne by both the government and 

insurers. The premium becomes

premiumPanRe =

The take-up rates for the Chubb and PRIA programs are calculated using a constant elasticity demand curve that has been fit to the premium and take-up rate for the 

BCPP. The demand curve is of the form

2 Insurers participating in the BCPP, as well as the other proposed programs, may face risk that the government will delay or fail to reimburse insurers for claim payments and expenses. Such risk is not considered in this 

analysis.

(C.12)

(C.13)

(C.14a)

(C.14b)

(C.15)

G&SE +

event _ prob *insurer _claims * 1( ) + LAE _ratio +

ror

















* ploss

1+

ror



.

G&SE +

event _ prob *insured _loss * 1( ) + LAE _ratio +

ror

















* ploss

1+

ror

 *copay _industry

.
Pandemic Risk Insurance Model 79

Qd = β * premium

participating _ firms

⎛

⎝

⎜

⎜

⎜⎜

⎞

⎠

⎟

⎟

⎟

⎟

−k

,

where Qd is the number of firms participating in the program and –k is the demand 

elasticity. The value for the demand elasticity in the base case is –0.50, and β is determined using the projected premium per firm and assumed take-up rate for the BCPP. 

The demand equation is then used to project take-up for the Chubb and PRIA programs using the projected premiums for those programs. The premium and take-up 

rates in the Chubb and PRIA programs are adjusted using the supply relationships 

(C.12–C.15) and demand relationship (C.16) until the market reaches equilibrium.

(C.16)

81

APPENDIX D

General and Selling Expense and Loss Adjustment Expense 

Ratios by Line of Business

Table D.1 reports the G&SE for P&C insurance in the United States by line of business based on the annual statements submitted by insurers to the National Association 

of Insurance Commissioners. Also reported is ratio of G&SE to premium written. To 

smooth out annual variation in the ratio, G&SE and premium are each summed over 

the five-year period spanning 2015 to 2019. Table D.2 contains similar information for 

LAE, direct incurred losses, and the LAE ratio. 

Table D.1

General and Selling Expense Ratio by Line of Business Between 2015 and 2019

Line of Business

Direct Written Premium 

($1,000s) G&SE ($1,000s)

Ratio of G&SE to 

Premium

Accident & health 31,814,525 7,918,434 0.249

Aircraft 8,210,399 2,138,151 0.260

Allied lines 57,707,058 16,109,499 0.279

Boiler & machinery 8,749,284 2,677,392 0.306

Burglary & theft 1,607,666 542,205 0.337

Commercial auto 179,308,672 47,045,168 0.262

Commercial multiple peril (liability) 74,977,328 23,721,032 0.316

Commercial multiple peril 

(nonliability)

129,430,443 39,595,324 0.306

Credit 10,140,205 3,318,878 0.327

Earthquake 11,722,601 2,998,260 0.256

Farmowners multiple peril 21,186,593 5,801,467 0.274

Federal flood 14,409,404 3,432,840 0.238

Fidelity 6,222,379 1,965,377 0.316

Financial guaranty 5,834,175 2,299,795 0.394
82 Improving the Availability and Affordability of Pandemic Risk Insurance

Line of Business

Direct Written Premium 

($1,000s) G&SE ($1,000s)

Ratio of G&SE to 

Premium

Fire 64,866,013 17,310,988 0.267

Homeowners multiple peril 466,275,407 119,320,224 0.256

Inland marine 113,496,742 30,052,156 0.265

International 339,248 289,823 0.854

Medical professional liability 46,129,920 9,666,079 0.210

Mortgage guaranty 25,292,672 5,635,553 0.223

Multiple peril crop 49,516,999 5,422,631 0.110

Ocean marine 17,728,623 4,942,283 0.279

Other P&C 7,196,874 1,758,662 0.244

General liability (other liability and 

product liability combined)

346,047,180 89,933,360 0.260

Personal auto 1,125,460,577 238,944,576 0.212

Private crop 5,198,145 1,191,984 0.229

Private flood 2,012,950 582,827 0.290

Surety 30,375,003 14,441,833 0.475

Warranty 12,945,324 2,345,340 0.181

Workers comp 275,414,629 57,867,280 0.210

All P&C lines 3,149,617,038 759,269,421 0.241

SOURCE: National Association of Insurance Commissioners data via S&P Global Intelligence, provided to 

RAND by the American Property Casualty Insurance Association.

Table D.1—Continued
General and Selling Expense and Loss Adjustment Expense Ratios by Line of Business 83

Table D.2

Loss Adjustment Expense Ratio by Line of Business Between 2015 and 2019

Line of Business

Direct Incurred Loss 

($1,000s) LAE ($1,000s)

Ratio of LAE to Direct 

Incurred Loss

Accident & health 24,028,892 1,317,504 0.055

Aggregate write-ins 3,285,362 382,824 0.117

Aircraft 4,688,739 871,490 0.186

Allied lines 47,331,501 4,619,968 0.098

Boiler & machinery 3,533,629 244,793 0.069

Burglary & theft 452,303 67,444 0.149

Commercial multiple peril (liability) 36,575,534 17,014,514 0.465

Commercial multiple peril 

(nonliability)

77,240,461 8,464,595 0.110

Commercial auto 123,397,681 22,035,696 0.179

Credit 4,441,500 356,332 0.080

Earthquake 264,489 78,853 0.298

Farmowners multiple peril 12,593,644 1,359,583 0.108

Federal flood 15,739,579 904,611 0.057

Fidelity 2,351,748 309,658 0.132

Financial guaranty 2,694,464 828,519 0.307

Fire 36,319,805 3,210,440 0.088

Homeowners multiple peril 286,960,410 41,501,726 0.145

Inland marine 56,244,592 4,198,689 0.075

International 220,661 36,985 0.168

Medical professional liability 22,485,904 12,748,962 0.567

Mortgage guaranty 3,419,471 294,421 0.086

Multiple peril crop 34,112,439 974,899 0.029

Ocean marine 9,622,185 1,305,775 0.136

General liability (other liability and 

product liability combined)

202,117,172 56,944,364 0.282

Personal auto 758,526,979 127,147,169 0.168

Private crop 4,881,920 194,393 0.040

Private flood 1,431,272 64,389 0.045

Surety 4,934,434 1,511,457 0.306
84 Improving the Availability and Affordability of Pandemic Risk Insurance

Line of Business

Direct Incurred Loss 

($1,000s) LAE ($1,000s)

Ratio of LAE to Direct 

Incurred Loss

Warranty 7,469,610 303,029 0.041

Workers comp 138,269,326 36,351,867 0.263

All P&C lines 1,925,635,706 345,644,949 0.179

SOURCE: National Association of Insurance Commissioners data via S&P Global Intelligence, provided to 

RAND by the American Property Casualty Insurance Association.

Table D.2—Continued
85

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86 Improving the Availability and Affordability of Pandemic Risk Insurance

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T

he COVID-19 pandemic led to a substantial drop in U.S. 

economic activity in 2020. Businesses often purchase 

business interruption coverage for loss of revenue due to 

fires and other perils, but insurers have held that in most 

cases they are not obligated to cover the enormous losses 

caused by COVID-19. Now, insurers, insurance industry trade groups, 

policyholder groups, and Congress have developed proposals to expand 

the availability of insurance for pandemic-induced business closures or 

restrictions.

The programs differ in several key dimensions, including the amount of 

risk borne by commercial insurers, the approach to paying claims, the 

extent to which the U.S. government receives a premium for the risk it 

bears, and the extent of policyholder subsidies. But the programs all 

seek to define benefits and the benefit distribution mechanism in advance 

rather than rely on programs hastily crafted after an event occurs.

The authors describe the distinguishing features of the most-visible 

proposals and develop a quantitative model that projects their potential 

consequences. Proposed programs are evaluated in terms of the 

proportion of revenue decline replaced (efficacy), efficiency, affordability, 

the risk borne by the commercial insurers, expected annual government 

net outlays, and the amount of subsidy provided to policyholders. This 

analysis provides information useful to assessing the advantages and 

disadvantages of different approaches for improving the availability and 

affordability of pandemic risk insurance.

RR-A1223-1 

Kenneth R. Feinberg Center for Catastrophic

Risk Management and Compensation

$27.25

www.rand.org 9 781977 407078

ISBN-13 978-1-9774-0707-8

ISBN-10 1-9774-0707-2

52725