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How we can set up America’s insurance system for a future pandemic

June 4, 2020, 11:00 PM UTC
temperature check outside an Apple store
Apple Re-Opens Retail Store In Charleston, SC Amid COVID-19 Pandemic CHARLESTON, SC - MAY 13: A security guard checks a customers temperature outside the Apple Store on May 13, 2020 in Charleston, South Carolina. Customers had temperatures taken and were required to wear masks at the store, also reopening locations in Idaho, Alabama, and Alaska following forced pandemic closures. (Photo by Sean Rayford/Getty Images)
Sean Rayford—Getty Images

We’re living through the unprecedented arrival of two black swans resulting from COVID-19: a double wallop of human suffering and a global lockdown. Businesses are experiencing losses that outpace any government support they may receive, and there is considerable debate over the role that insurance should play in covering this economic damage.

Insurers will certainly pay billions of dollars in coronavirus-related losses across a wide number of policies. However, not every policy will apply, and some policyholders will be disappointed. The insurance sector’s response should not end there. Instead we should collectively push to create solutions that enhance resilience. The scale of this challenge requires an approach that incorporates the efforts of insurers, government, and policyholders to develop the right playbook for any future pandemic.

Marsh, our insurance brokerage unit, helps companies find appropriate policies. As such, we could benefit financially from the advice offered here.

Insurance gives businesses the needed confidence to open their doors and take entrepreneurial risks. In the case of pandemics, insurance can help reduce widespread risk and build resilience to prevent future economic devastation on the scale we’ve seen recently.

The reality is that pandemic coverage has existed for a long time, but it has always been expensive and relatively rare; it’s often explicitly excluded from various insurance policies. The reason is grounded in both math and psychology: The payouts, while sporadic, can be so enormous they dramatically exceed insurers’ capacity to bear them. While most insurance policies cover events that may impact a single company (such as a fire) or region (like a hurricane), pandemics can impact the whole world. On the psychology side, it’s always harder to convince a company to buy insurance that protects against something that hasn’t happened in a hundred years and seems theoretical. Pandemic insurance has suffered from both supply and demand limitations.

While we can’t rewrite history, we can work together to underwrite a better future—and we should start immediately. Recent research from the World Economic Forum (in partnership with Marsh & McLennan and Zurich Insurance Group) found, “Pandemics have traditionally suffered from a panic-neglect cycle. Quiet periods see no action, early warnings of an outbreak tend to be overlooked, significant response and funding are late and uncoordinated, and valuable lessons from the crisis are not institutionalized.” In fighting COVID-19, we are rapidly developing both drug therapies and vaccines; let’s think about pandemic insurance the same way.

One institutionalized lesson to learn right now is that we can boost our economic resilience by forging a meaningful pandemic insurance system. Doing so will require shared action from the insurance sector, the federal government, and policyholders.

Robust national pandemic management needs insurers, backed by the federal government, to write pandemic insurance policies and brokers to contribute their risk knowledge and infrastructure. Widespread pandemic coverage would make the insurance sector the first line of economic response in future outbreaks. 

Relying on existing insurance processes to pay losses would improve on the operational scramble we’ve seen plague efforts like the Paycheck Protection Program. Increased insurance coverage will also help banks and other capital providers better understand and price risk and more confidently inject equity in vulnerable sectors.

The U.S. government is the only entity with the financial resources to help close the pandemic coverage gap. The government already plays a role insuring against certain widespread risks that impact our national well-being. It’s clear that pandemics should be among those risks, and there’s a debate underway over which model would work best.

Some in the insurance industry favor modeling a pandemic risk insurance program after the National Flood Insurance Program, under which the government assumes sole risk for flooding damages in certain communities. This is a potential solution, but having the government be the only provider of pandemic insurance may not result in sufficient societal and economic resilience. We need the market dynamics of the private insurance sector to help promote risk mitigation strategies and actively engage policyholders through education and incentives to lower their risks.

Behavioral economics and recent history indicate that some private capital should still be on the line. After the 9/11 attacks, Congress passed the Terrorism Risk Insurance Act, which created a federal backstop for insurance claims arising from terrorist attacks. But the government did not assume all responsibility on its own. As a result, insurance companies wrote terrorism policies, businesses improved their security practices, and the country is more resilient to the threat. 

Fortunately, the hesitance among some insurers to deploy capital is far from universal: There are a number of carriers that are willing to put private capital at risk so long as there is a strong government backstop. We work with many of them to help our clients manage risk. 

With the right public-private solution, policyholders will take significant steps to bend the risk curve in collaboration with carriers, brokers, and risk advisers. While the world waits for a COVID-19 vaccine, all stakeholders must be part of ensuring that once this pandemic is eradicated, we remain vigilant against future outbreaks. 

The new normal in manufacturing will likely include more geographically diversified supply chains. Stores and restaurants will shift to contactless payment. Businesses of all kinds will have infrastructure to support remote work or social distancing, new standards for cleaning facilities, and plans to be able to diagnose their employees daily. These steps will reduce the cost of future pandemic insurance and help prevent future outbreaks from reaching the scale of COVID-19.

One lesson of the coronavirus is that we all underestimated our susceptibility to a pandemic and the domino effect it would have on our global economy. Certain risks—like terrorism, massive cyberattacks, and pandemics—are too big for government or the private sector to manage alone and too important to ignore. 

A strong pandemic insurance system can make us more resilient to risk and avoid the panic-neglect cycle—and inspire more economic confidence into the future.

Daniel S. Glaser is CEO of Marsh & McLennan.