Why pandemic insurance is impossible
At the Berkshire Hathaway shareholders meeting this month, CEO Warren Buffett told a shareholder that Berkshire would certainly insure against pandemics “at the right price.”
“We would have written pandemic insurance if people had come to us and offered what we thought was the right price,” Buffett said. “We would have been wrong, probably in doing it. But we have no reluctance to quote on very unusual things and very big limits — we’re famous for it.”
Being open to writing pandemic insurance makes Berkshire, which owns 70 insurance companies including Geico, Gen Re, NRG, and Berkshire Hathaway Assurance, somewhat unique among insurance companies. Most insurers see this kind of insurance as too risky, and policies would be prohibitively expensive.
Almost no one had pandemic insurance
In the fallout of the COVID-19 crisis, many businesses found that their business-interruption coverage did not shield them from pandemic-induced losses. It’s common for businesses to have business interruption insurance rolled up in their standard property insurance policies that cover the loss of income in cases of physical damage, like fire or water. But generally most of those policies are contingent on having a physical damage claim, and are not for any business interruption.
According to the Insurance Information Institute, the trade group for many of the largest insurance companies, standard policies even come with “virus and bacteria” exclusions.
So for a virus-borne problem, this left many businesses high and dry. Some business owners have tried to sue insurers saying that viruses and bacteria — for policies without exclusions — damage surfaces they touch. The industry says this isn’t physical damage, and that paying out for that wouldn’t be fair to businesses that have what they see as physical property damage, like fires.
With the current crisis underscoring how devastating an unexpected disaster can be and how pandemics aren’t covered, insurers and businesses face a new question: how do we insure against future situations similar to COVID-19?
The ‘right price’ may not exist
In the insurance industry, it’s hard to find pandemic-specific policies or business interruption insurance that includes impact from pandemics. During the current crisis, insurance companies are generally paying out through workers compensation and general event cancellation insurance claims, which are not uncommon.
But numerous large insurance companies didn’t have a single pandemic-specific insurance policy on the books — because it’s so expensive. That’s the reason why only a few examples of pandemic insurance exist — like the Wimbledon tennis tournament.
Buffett said Berkshire would insure at the “right price,” alluding to the fact that a policy would be very expensive. With enough money, anything can be worth it to an insurer.
But a policy affordable enough for someone to actually buy and risk-managed enough for an insurer to sell may be mutually exclusive, except in very specific circumstances. It’s an insurance catch-22.
Insurance is the business of hedging risk, and calculating the risk of a pandemic involves a wild amount of unknowns and an almost unlimited downside.
One insurer told Yahoo Finance that a potential policy would be difficult to draw up, especially because it would have to involve lots of language clarifying exactly how a pandemic can be defined.
Most catastrophic events have finite timeframes and locations. A hurricane hits a geographic area and then goes away, but a pandemic has a unique ability to disrupt — with far more uncertainty over how bad it’s going to be or how long it will last.
“Unlike other catastrophic events, like hurricanes or tornadoes, pandemics are not limited geographically and extend over long and uncertain time periods,” Chubb’s general counsel Joe Wayland told Yahoo Finance.
Pricing pandemic insurance, compared to event cancelations, has the complication that if an event happens, the pool of money would quickly disappear.
This is why many insurance companies see these kinds of things, like terrorism and nuclear disaster, as essentially uninsurable without the help of the government. Flood insurance could be offered by insurers, but the prices would be prohibitively expensive without government aid.
“Global pandemic risks are uninsurable by private insurers, and only the federal government has the financial resources to cover them,” an Insurance Information Institute spokesperson said in an email.
The only way to offer insurance that would be affordable, Chubb’s Wayland said, would have to involve the government.
“We believe in the potential viability of a public-private partnership to provide coverage for pandemics in the future, but only if the government takes on a significant amount of the risk,” he said. “The insurance industry by itself can’t take on all of what is essentially an infinite risk with the potential to have virtually every insured business suffering a significant loss.”
For now, insurance companies are closely observing the various outcomes of the pandemic, on the chance they could bring a specific insurance product to the market. But even months into the ordeal, there’s no end in sight — the last thing an insurer would want to be on the other side of.
Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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