Rich e , And eas; Wilson, Thomas C.
A icle — Published Ve sion
Co id-19: implica ions o insu e isk managemen and
he insu abili y o pandemic isk
The Gene a Risk and Insu ance Re iew
P o ided in Coope a ion wi h:
Sp inge Na u e
Sugges ed Ci a ion: Rich e , And eas; Wilson, Thomas C. (2020) : Co id-19: implica ions o insu e
isk managemen and he insu abili y o pandemic isk, The Gene a Risk and Insu ance Re iew,
ISSN 1554-9658, Palg a e Macmillan UK, London, Vol. 45, Iss. 2, pp. 171-199,
h ps://doi.o g/10.1057/s10713-020-00054-z
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/288716
S anda d-Nu zungsbedingungen:
Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen
Zwecken und zum P i a geb auch gespeiche und kopie we den.
Sie dü en die Dokumen e nich ü ö en liche ode komme zielle
Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich
machen, e eiben ode ande wei ig nu zen.
So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen
(insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en,
gel en abweichend on diesen Nu zungsbedingungen die in de do
genann en Lizenz gewäh en Nu zungs ech e.
Te ms o use:
Documen s in EconS o may be sa ed and copied o you pe sonal
and schola ly pu poses.
You a e no o copy documen s o public o comme cial pu poses, o
exhibi he documen s publicly, o make hem publicly a ailable on he
in e ne , o o dis ibu e o o he wise use he documen s in public.
I he documen s ha e been made a ailable unde an Open Con en
Licence (especially C ea i e Commons Licences), you may exe cise
u he usage igh s as speci ied in he indica ed licence.
h ps://c ea i ecommons.o g/licenses/by/4.0/
Vol.:(0123456789)
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
h ps://doi.o g/10.1057/s10713-020-00054-z
ORIGINAL ARTICLE
Co id‑19: implica ions o insu e isk managemen
and heinsu abili y o pandemic isk
And easRich e 1· ThomasC.Wilson1,2
Recei ed: 21 May 2020 / Accep ed: 20 Augus 2020 / Published online: 22 Sep embe 2020
© The Au ho (s) 2020
Abs ac
This pape analyzes he insu abili y o pandemic isk and ou lines how unde w i ing
policies and scena io analysis a e used o build esilience up on and plan con ingency
ac ions o c isis scena ios. I hen summa izes he unique “lessons lea ned” om he
Co id-19 c isis by baselining ac ual de elopmen s agains a easonable, p e-Co id-19
pandemic scena io based on he 2002 SARS epidemic and 1918 Spanish in luenza pan-
demic. Ac ual de elopmen s suppo he p e-Co id-19 hypo hesis ha inancial ma ke
de elopmen s domina e claims losses due o he demog aphics o pandemics and o he
ac o s. Howe e , Co id-19 “su p ised” ela i e o he p e-Co id-19 scena io in e ms o
i s impac on he eal economy as well as on he p ope y and casual y segmen as busi-
ness in e up ion p ope y igge s and exclusions a e challenged, some hing ha may
ad e sely impac he insu abili y o pandemics as well as he pe cep ion o he indus y
o some ime o come. The unique lessons o Co id-19 ein o ce he need o esilience
up on in sol ency and liquidi y, he need o imp o e business in e up ion wo dings
and e-unde w i e he book, and he ecogni ion ha business in e up ion caused by
pandemics may no be an insu able isk due o i s la ge accumula ion po en ial and he
h ea o ex e nal mo al haza d. These insu abili y limi a ions lead o a discussion abou
he s uc u e and inancing o p o ec ion agains he impac o u u e pandemics.
Keywo ds Financial c isis· Co id-19· Pandemic isk· Resiliency· Insu abili y·
Risk managemen
JEL classi ica ion G01· G22· G32· H12
Thomas C. Wilson, Un il 1 July 2020, Chie Risk O ice , Allianz SE, Munich, Ge many; cu en ly,
Depu y CEO, Allianz Ayudhya, Bangkok, Thailand and Hono a y P o esso , Applied Risk
Managemen and Insu ance, Ludwig-Maximilians-Uni e si ä München (LMU Munich), Munich,
Ge many.
* Thomas C. Wilson
[email protected]. h
1 Ludwig-Maximilians-Uni e si ä München (LMU Munich), Munich, Ge many
2 P esen Add ess: Allianz Ayudhya, Bangkok, Thailand
172
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
1 In oduc ion
D ama ic e en s wi h se e e consequences o he inancial sec o occu wi h a ea-
sonably high equency; a non-exhaus i e lis o examples includes he 2011 Eu o-
pean so e eign deb c isis, 2008 inancial c isis, 2002 SARS epidemic, 2001 do com
bubble, 1997–1998 Asian-Russian c isis, and 1987 Black Monday. No wi hs anding
hei equency, each e en o c isis has a unique o igin, a unique e olu iona y pa h
and a unique denouemen in e ms o i s impac on he insu ance indus y and soci-
e y mo e b oadly. Because o hei uniqueness, insu e s and egula o s o en adap
hei isk managemen and supe iso y amewo ks ollowing a c isis o e lec he
unique “lessons lea ned” om he la es expe ience.
Mos ecen ly, Co id-19 has e ol ed in o a c isis o global p opo ions wi h a sig-
ni ican impac on indi idual heal h, eal economic ac i i y, inancial ma ke s, and
poli ical and social sys ems; we a e s ill a he beginning o he c isis, wi h a e y
unce ain ajec o y and e en mo e unce ain y ega ding he ul ima e consequences
o insu e s, egula ion, and how socie y iews he indus y.
The goal o his pape is, i s , o de e mine how well insu e isk managemen
p ac ices ha e wo ked du ing he c isis and, second, o specula e how isk manage-
men p ac ices, egula o y ⁄ supe iso y app oaches and socie al iews o he indus-
y may e ol e as a consequence; hese ques ions a e impo an bo h o p ac i ion-
e s who s i e o imp o e in e nal isk managemen p ac ices based on he unique
“lessons lea ned” as well as o p uden ial and sys ema ic egula o s in he design
o u u e isk-based capi al and s ess es ing egimes, especially o p e en sys emic
ex e nali ies. Thi d, his pape add esses he ques ion o whe he pandemics a e an
insu able isk and how u u e pandemic co e age migh be a ec ed by Co id-19.
Because i is he ea ly s age o he c isis, we a e o ced o specula e on u u e de el-
opmen s; de ailed desc ip ions o he a e ma h will su ely ollow.
Insu ance isk manage s ha e some impo an ools wi hin hei En e p ise Risk
Managemen (ERM) amewo k o manage po en ial c isis scena ios (see, e.g., Wil-
son 2015, 2013). The mos impo an o hese include unde w i ing and loss accu-
mula ion limi a ions a he policy le el and scena io analysis (also see Schoemake
1995) o assess and manage he esiliency o complex accumula ions o isks. Bo h
a e ocused on building esiliency by c ea ing a o able ini ial condi ions as well as
he op ionali y o exe cise e ec i e con ingency measu es.1
P e-Co id-19 scena io analysis p edic ions we e me o a g ea ex en by he
ac ual c isis in he ma e iali y o losses om inancial ma ke s, in he ela i e imma-
e ial impac om li e claims, and in he e ec i eness o business con inui y meas-
u es. The ac ual impac on p ope y and casual y claims was likely a “su p ise”
ela i e o p e-Co id-19 s ess scena ios, howe e , because o accumula ions in
en e ainmen lines and because o unan icipa ed challenges o business in e up ion
policy wo dings and exclusions. The unique lessons om Co id-19 bo h ein o ce
1 Fo a b ie discussion o building insu e esilience o inancial c ises see, o ins ance, Be lie (2009);
o mo e gene al discussions on company esilience owa ds na u al disas e isk see, e.g., Be ke and
Campanella (2006), o Fuchs (2009), and o he con ex o cybe isk Ho mann e al. (2018).
173
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
he need o inancial esilience and se ou a new agenda o imp o ing con ac ing
language and accumula ion con ol o p ope y and casual y insu ance. Also, he
Co id-19 c isis has e ealed ha aspec s o pandemic isk, such as business in e -
up ion and e en cancela ion caused by pandemic supp ession, in hei en i e y
exceed he limi s o insu abili y. The un-insu abili y is mainly due o he la ge accu-
mula ion po en ial and he possibili y o ex e nal mo al haza d esul ing om busi-
nesses’ pandemic co e age being aken in o accoun when public policy decisions
a e made.
In Sec .2, we discuss he insu abili y o pandemic isk, be o e Sec .3 summa-
izes c i ical elemen s o an insu e ’s c isis isk managemen amewo k, ocusing
on policy unde w i ing and scena io based isk accumula ion managemen o build
esilien ini ial condi ions and con ingency plans, emphasizing he impo ance o
building esiliency. Sec ion4 ou lines a gene ic pandemic scena io analysis, desc ib-
ing wha insu ance companies we e conce ned abou ega ding pandemics p io o
he Co id-19 c isis. The goal o his sec ion is o p o ide a “baseline” agains which
o measu e he unique “su p ises” caused by he ac ual Co id-19 de elopmen s.
Sec ion5 compa es ac ual Co id-19 de elopmen s o da e agains he p e-Co id-19
scena io o inancial ma ke s, p ope y & casual y and li e & heal h segmen s as
well as indica ions o egula o y and public policy esponse. In he inal Sec .6, we
conclude wi h some lessons lea ned o insu e s’ c isis isk managemen p ac ices
and u u e pandemic isk co e age.
2 On heinsu abili y o pandemic isk
The e a e wo majo po en ial impedimen s o he insu abili y o pandemic isks: he
i s is he la ge po en ial loss accumula ion and he second is he issue o po en ial
ex e nal mo al haza d caused by dis o ed incen i es o public policy decisions.2
Epidemic and pandemic isks a e cha ac e ized by accumula ions po en ially
la ge enough o aise he ques ion o insu abili y.3 Like na u al disas e s (such as
loods, ea hquakes, hu icanes) o man-made ca as ophes (e.g., caused by e o -
ism), an epidemic can gene a e la ge accumula ions o insu ed losses. As na u al
and man-made disas e s ypically a e egionally concen a ed e en s, insu ance
ma ke s make use o egional di e si ica ion ia global unde w i ing, einsu ance
o insu ance-linked secu i ies in o de o p o ide co e . (S ill, ce ain ypes o such
ca as ophes canno be ully co e ed by he insu ance indus y; loss scena ios p o-
ide es ima es ha migh exceed he wo ldwide capaci y o he indus y as a whole.
See, e.g., Cummins e al. 2002, o conside a ions ega ding he ma ke s’ capaci y.)
2 The e m ex e nal mo al haza d e e s o insu ance-induced changes in beha io o hi d pa ies which
a ec he size o insu ance paymen s (see Nell 1993; Nell e al. 2009).
3 In ou discussion o insu abili y, we loosely ollow a se o c i e ia ha goes back o Wal e Ka en
(see, o ins ance, Ka en 1972, 1997 o Ka en e al. 2018): We look o po en ial insu abili y p oblems
esul ing om co ela ion and/o he size o a loss, in o ma ion asymme ies (in pa icula mo al haza d),
insu icien knowledge abou he loss dis ibu ion and di icul ies in p ecisely de ining he insu ed isk.
174
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
Howe e , pandemics by de ini ion imply ha egional di e si ica ion is likely o
be less help ul o managing his h ea . As demons a ed by Co id-19, a con agious
i us can a el a ound he globe quickly, impac ing a la ge pa o he wo ld a he
same ime—a cha ac e is ic which is sha ed by, e.g., cybe isk, whe e, because o
he connec edness o compu e sys ems, malwa e can sp ead a ound he wo ld in
e y sho ime (a p ominen example being he ansomwa e “WannaC y”; see, e.g.,
Munich Re 2017; Swiss Re 2017).4
While high co ela ion in li e and heal h insu ance po en ially co e ed losses is
a de ining ea u e o pandemic isk, he Co id-19 c isis has highligh ed he accu-
mula ion po en ial also wi h espec o inancial ma ke losses and o p ope y and
casual y losses (in pa icula non-p ope y damage business in e up ion and e en
cancela ion). Combined wi h legal unce ain y and issues wi h imp ecise wo ding
his has caused an unpleasan “su p ise” o he indus y.
Unambiguous wo ding and he p ecise de ini ion o he insu ed e en and co e -
age a e s aigh o wa d equi emen s o an insu able isk. The consequences o he
lock-down in many cases ha e led o discussions abou whe he he e ac ually was
co e age unde ce ain policies (we will e isi his issue in mo e de ail in Sec .5.4).
This highligh s how he insu abili y c i e ion o an unambiguous and p ecise de ini-
ion o he isk o en ep esen s a challenge o eal-li e insu ance policies, espe-
cially when new isks o unp eceden ed e en s a e conce ned. The ealiza ion ha ,
e.g., business in e up ion insu ance migh (unin endedly) include p o ec ion agains
losses caused by a gene al lock-down, esembles he p oblem o so-called silen
cybe isk (see Guy Ca pen e 2018) o , simila ly, o eme ging h ea s and unex-
pec ed cou ulings in he con ex o liabili y insu ance (an example is he well-
known Jackson Township case; see, e.g., Kun eu he 1987).
The ac ha in many cases wo ding has u ned ou o be imp ecise wi h espec
o he ques ion o whe he speci ically he accumula ion isk o lock-down ela ed
business in e up ions was co e ed, sugges s ha hese scena ios we e unde es i-
ma ed o igno ed. This also demons a es he challenges o adequa e quan i ica ion
and p icing o such isk. Gene ally, i can be no ed, ha he e is se e e unce ain y
associa ed wi h modeling he equency and se e i y o a pandemic.
Ano he cha ac e is ic o a pandemic is he ac ha , unlike mos na u al and
man-made ca as ophes, losses ma e ialize o e ime. Du ing his pe iod, go e n-
men al and pe sonal decisions a e aken o con ain o supp ess he pandemic. F om
he insu ance indus y’s poin o iew and wi h u u e p oduc design in mind, an
impo an ques ion is whe he insu ance co e age a ec s hese decisions, o in o he
wo ds, whe he mo al haza d can be an issue. As such decisions a e made only a e
he pandemic has s a ed, a pa icula ocus should be on ex pos mo al haza d—
al hough in he u u e, wi h now inc eased awa eness o pandemic isk, i will also
be c ucial o keep an eye on he e ec ha he a ailabili y o p o ec ion will ha e
on businesses’ e o in p epa ing o a pandemic. (Howe e , since co e age p o-
ided by he insu ance indus y o h ough o he suppo mechanisms, will likely
4 See Ha wig e al. (2020) o a de ailed discussion abou he e ec o he co ela ion o pandemic
losses on he amoun o capi al ha is needed o c edibly insu e he isk.

175
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
be limi ed due o he accumula ion po en ial, i can be expec ed ha ex an e mo al
haza d will also be limi ed).
Incen i e alignmen p oblems can occu be ween he insu ed and he insu e ,
whe e, o ins ance he insu ed has o decide abou whe he o no o cancel an e en .
As discussed, e.g., in Tu ne (2020) and Cla ey (2020), he 2020 Wimbledon en-
nis championships we e canceled while he F ench Open we e me ely pos poned—a
di e ence ha may well ha e been due o he ac ha only he o me had cancela-
ion co e age. While Wimbledon’s co e age ecei ed g ea a en ion and migh sig-
ni ican ly inc ease he demand o pandemic insu ance among e en o ganize s, i
has also highligh ed he di icul ies in p icing such isk and he impo ance o policy
igge s ha a e beyond he insu ed’s con ol.
De ining igge s ha , e.g., e e o pa ame e s o a pandemic will no be i -
ial, bu should become easie as in he a e ma h o he Co id-19 c isis i can be
expec ed ha public esponse mechanisms and in o ma ion collec ion will be
e iewed and imp o ed. Howe e , whe e policy igge s in ol e he ex en o con-
ainmen measu es in place, a en ion mus be paid o a se e e h ea o ex e nal
mo al haza d ha can esul om poli ical decision-make s’ incen i es o look o
deep pocke s. Decisions abou con ainmen measu es migh be in luenced by he
deg ee o which a ec ed businesses a e insu ed. E en wo se, he e is a isk ha
he e would be p essu e on he insu ance indus y o co e losses e en i hey a e
excluded, o o ew i e con ac s o co e business in e up ion e oac i ely. This
h ea is o cou se mo e likely whe e public pe cep ion is ha policy wo ding has
been ambiguous.
The Co id-19 c isis shows how social p essu e on he indus y o pay claims can
become a majo ac o in de e mining he po en ial losses om he pandemic, po en-
ially e en i such paymen s equi e a e oac i e change in e ms and condi ions.
This p essu e began in he social media wi h wee s om US P esiden T ump in
ea ly Ma ch sugges ing ha business in e up ion should in any case be co e ed by
insu e s, con inued wi h explici ac ion by eigh US s a es which ha e in oduced
legisla ion “which would equi e insu e s o pay claims, mainly o small businesses,
despi e exclusions” (Reu e s 2020), and is p omo ed by legisla o s saying ha “ e -
oac i e BI co e (is) needed o sa e US businesses” (Thind 2020). Acco ding o
Walke (2020), “[i]nsu e s a ound he wo ld a e acing legal p essu e o pay busi-
ness in e up ion claims a ising om Co id-19 lockdowns, and some ju isdic ions
ha e p oposed legisla ion o en o ce e oac i e co e age.”
3 C isis managemen
Some c ises mani es linea ly om igge e en o ajec o y o denouemen ; o
example, he localized c isis igge ed by a hu icane has a easonably di ec e olu-
ion: he wind blows and ain alls, houses a e des oyed and people disloca ed, ol-
lowed by localized ebuilding and eco e y inanced by insu ed claims, sel -insu ed
e en ions and public con ibu ions o elie e o s.
Howe e , he ajec o ies o b oade inancial and social c ises a e o en cha ac-
e ized by a chao ic accumula ion o many hings going w ong in unexpec ed and
176
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
sys emically ein o cing ways; examples such as he 2008 global inancial c isis, he
2011 Eu opean so e eign deb c isis and, now, Co id-19 come o mind. C isis man-
agemen is abou being esilien o bo h se e e indi idual isks as well as a b oad
spec um o po en ial unexpec ed and sel - ein o cing isk accumula ions.
Insu e s ha e a a ie y o ools in hei En e p ise Risk Managemen (ERM)
amewo k which a e use ul in building esiliency and con ingency ac ions agains
po en ial c ises (see Wilson 2015, 2013). The mos impo an ools all in o wo
b oad ca ego ies—unde w i ing and accumula ion managemen a he policy le el,
and in e nal models and scena io analysis o measu e and manage mo e complex
accumula ions.
3.1 Unde w i ing andaccumula ion con ol
Unde w i ing and accumula ion con ol a he indi idual policy le el a e a he co e
o managing insu ance businesses and also o c isis isk managemen . Mo e speci i-
cally, explici and legally en o ceable policy con ac wo dings se e o limi isks
o hose ha a e insu able and desi ed by he insu e as well as limi ing exposu e o
indi idual insu ed e en s.
Conside , o example, cybe insu ance which p esen s unique unde w i ing chal-
lenges— he clien ’s exposu e is di icul o assess om a isk enginee ing pe spec-
i e, i is di icul o unde w i e due o a lack o his o ical loss expe ience combined
wi h a apidly e ol ing h ea landscape, and he e is a high po en ial accumula-
ion isk om, e.g., s a e-sponso ed, c iminal o e o is ac i i ies. P uden insu -
e s unde w i e cybe insu ance h ough explici wo dings and limi s on a i ma i e
cybe con ac s and, inc easingly, h ough explici exclusions on non-a i ma i e
con ac s a e used o elimina e “silen cybe ” exposu es. In addi ion o con ac
e ms, condi ions and limi s, accumula ed peak exposu es o indi idual e en s a e
o en ceded o he einsu ance ma ke unde a acul a i e o excess o loss einsu -
ance co e . Collec i ely, hese ac ions make he po en ial exposu e anspa en and
limi he book o insu able isks wi hin he isk appe i e o he o ganiza ion.
In he cu en pandemic isk con ex , his same ype o s uc u ing a he policy
le el is e iden in he sepa a ion and limi a ion o p ope y damage and non-p op-
e y damage business in e up ion con ac s. Non-p ope y damage business in e -
up ion co e age is also challenging o unde w i e due o he b ead h o po en ial
igge s, dynamically changing exposu es as well as he high po en ial accumula-
ions; as such, he bulk o business in e up ion insu ance sold has p ope y damage
igge s wi h ewe non-p ope y damage ex ensions, and hese only wi h sepa a e
and clea limi a ions.
3.2 In e nal models andscena io analysis
While unde w i ing and accumula ion con ol ocuses on indi idual isks, isks can
accumula e ac oss policies and asse s in complex ways. In e nal models and sce-
na io analysis a e used o o mula e a iew on complex accumula ions.
177
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
Insu e s use in e nal models o suppo decision-making ac oss a b oad spec-
um o ac i i ies, including he assessmen o isk accumula ions, he adequacy
o sol ency capi al and he adequacy o p icing om a isk- e u n pe spec i e.
Value a Risk (VaR) o na u al ca as ophe models, capi al-/ea nings-/liquidi y-a -
isk models, and isk-based echnical p icing amewo ks such as Re u n on Risk
Capi al (RoRC) a e impo an componen s ha help ul ill hese needs (see, o
example, Wilson 2015).
Models wo k bes in en i onmen s cha ac e ized by s a iona y dynamics
and su icien p io in o ma ion o cha ac e ize po en ial u u e s a es and con-
sequences. Fo example, inancial VaR models and echnical unde w i ing ools
use his o ical ime se ies and/o panel da a o es ima e equency and se e i y
dis ibu ions in he hope ha pas expe ience will be ep esen a i e o po en ial
u u e ou comes. Whe e he e is insu icien da a o whe e he en i onmen is
non-s a iona y ye p edic able, scien i ic analysis and expe judgmen a e used
o augmen he da a. Examples include ese e isk adjus men s o lines a ec ed
by p edic able bu unce ain social in la ion, na u al ca as ophe models wi h sci-
en i ically de i ed haza d maps and loss dis ibu ion assump ions o new lines
o business o inancial a iables (see, o example, he discussion o managing
known, unknown and unknowable isks in Wilson 2015).
Howe e , use ul in e nal models may be, hey a e none heless abs ac ions o
a much mo e complex and dynamic eali y. As a consequence, models wo k ea-
sonably well du ing “no mal” imes, bu end o ail du ing imes o c isis simply
because he igge , e olu ion and denouemen o each c isis is unique wi h lim-
i ed his o ical p eceden s. As abs ac ions o eali y, all models will be “w ong”
in he nex c isis.
P uden isk manage s he e o e augmen in e nal models wi h scena io analy-
sis, a p ocess o asking “wha i ” by de ining complex scena ios o ajec o ies
based on he cu en , speci ic s a e o he wo ld; analyzing he impac on a i-
ables o in e es such as sol ency, liquidi y and/o ea nings and epu a ion; e al-
ua ing hese agains he ins i u ion’s isk appe i e; and, ul ima ely, aking di ec
ac ions o de eloping con ingency plans o inc ease esilience. (Fo a de ailed
desc ip ion o scena io analysis in he con ex o 2011 Eu opean so e eign deb
c isis, see Wilson 2013.)
Insu e s use scena io analysis and s ess es ing in o de o enhance esilience by
limi ing accumula ions o he po en ial scena io and de eloping po en ial con in-
gency and eco e y plans. Mos insu e s un a wide ange o s ess es s in o de o
de e mine whe he hei exposu es a e consis en wi h he ins i u ion’s isk appe i e,
including o example
• Pa ame ic scena ios, e.g., −50/−100 bps a es down, −30% equi y ma -
ke s, + 50/+ 100 bps c edi sp eads, e c.;
• His o ical scena ios used on cu en exposu es, e.g., 2008 global inancial c isis,
2011/2012 Eu opean so e eign deb and bank c isis, 2002 SARS o 1918 Span-
ish In luenza epidemics, e c.;
• Re e se s ess es s, e.g., asking wha possible scena ios would b ing he com-
pany o a speci ic sol ency o loss le el?
178
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
• Li e and Heal h (LH) isk-speci ic s esses, including mo ali y, mo bidi y o heal h
shocks such as pandemics, inc eased longe i y scena ios and beha io al changes o
lapsa ion/annui iza ion a es o e i emen p oduc s;
• P ope y and casual y (PC) isk-speci ic s esses, e.g., 1-in-250/500/1000 yea
ea hquake o hu icane scena ios; maximum p obable loss scena ios o cybe o
man-made clashes, e c.; seconda y accumula ion scena ios including sunami, wild
i es, e c.;
• Ope a ional scena ios including business con inui y om pos -ca as ophe wo k a
home condi ions, ailu es in in as uc u e, supplie s, e c.; and,
• B oade , socio-economic s esses, e.g., an escala ion om a US–China ade wa o
de-globaliza ion, a cybe wa and ul ima ely in o limi ed engagemen in Asia Paci ic;
B exi , I alexi , F exi , Dexi ; land wa on he Ko ean peninsula; bail-inable Eu o-
pean bank deb du ing a banking c isis, e c.
While s ess es ing is an in aluable isk managemen ool, i does ha e i s limi a-
ions: o example, jus like an in e nal model, any s ess es will be “w ong” in he
de ails o he nex c isis and i may be challenging o ge managemen o “buy in” o
s ess es s based on e en s which a e pe cei ed as being o e ly ex eme. O wha use o
managemen is a scena io wi h a USD 500mn po en ial loss bu a s anda d de ia ion o
USD 5 bn? O a scena io wi h a USD 5 bn po en ial loss bu a managemen es ima ed
p obabili y o occu ence o less han 0.001%, especially i managemen ’s pe cep ions
may be in luenced by beha io al biases which es ic he ecogni ion o ex eme e en s
(discussed in Sec .3.3)?
Risk manage s mi iga e hese issues h ough se e al di e en mechanisms: i s ,
by compa ing ad hoc s ess scena ios agains he esul s o his o ical s ess scena ios,
ein o cing he ecogni ion ha la ge e en s do in ac happen; secondly, by de ining
a obus isk appe i e “en elope” by isk ca ego y which helps o no malize he spe-
ci ic de ails o an ad hoc scena io by using a common me ic o measu e he esul s.
Fo example, he e a e many po en ial inancial ma ke scena ios which migh lead
o a USD 500mn inancial ma ke loss (e.g., 2011/2012, 2008, 2001, 1997, e c.): he
exac de ails o how he loss eme ges is no as impo an as whe he managemen has
de ined a “ isk en elope” o inancial ma ke losses and whe he he 2020 Co id-19
scena io alls wi hin his en elope a e exis ing esiliency measu es ha e been es ed.
I i alls ou side o managemen ’s isk en elope, hen u he analysis and discussion
a e wa an ed.
In he con ex o pandemics, di e en elemen s o his s ess es ing amewo k
become impo an : clea ly, LH-speci ic mo ali y, mo bidi y, and longe i y assump-
ions need o be s essed; in addi ion, he insu e has o ake a b oade iew on po en-
ial sys emically ein o cing accumula ions o con agion o o he a eas, especially he
impac on inancial ma ke s, po en ial PC claims and ope a ional esiliency.
185
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
conclusions.9 In he emainde o his sec ion, we ou line a a high le el, he SARS
epidemic and 1918 Spanish in luenza pandemic scena ios which i ms may ha e
used o hei annual scena io analysis.
4.2 SARS his o ical scena io
A good desc ip ion o he SARS epidemic and esul ing consequences can be ound
in Knoble e al. (2004). Pa aph asing Monaghan (2004), SARS had a disp opo -
iona ely la ge economic and poli ical impac ela i e o i s di ec cos s, especially
om he pe spec i e o he insu ance indus y:
• Mo ali y and heal h impac : I is es ima ed ha SARS caused (only) 813 dea hs
om 2002 o 2003. By 2003, he es ima es o he in ec ed and dea hs we e 8.218
and 802, espec i ely, o he coun ies mos a ec ed (China, Hong Kong, Tai-
wan, Singapo e, Thailand and Canada).
• The inc emen al impac o he insu ance sec o om di ec cos s was limi ed
due o a a ie y o ac o s:
º Fi s , he low absolu e numbe o in ec ed and dea hs ela i e o o he , exis ing
co e ed diseases (see Figs.5–8 in Knoble e al. 2004);
º Second, in e ms o mo ali y and heal h claims, mi iga ing ac o s o a
simila scena io happening oday would include
• Go e nmen p o ision o es ing, isola ion and ea men ac i i ies;
• Fa o able demog aphics o in ec ion and mo ali y, impac ing geog aphies
(e.g., a disp opo iona e impac on de eloping Asia) and age segmen s
(e.g., a s eadily inc easing excess mo ali y cu e wi h mos a ali ies in
he 60+ age b acke , see Table1 in WHO 2003) which do no ypically
ha e a high pene a ion a e in e ms o heal h and mo ali y insu ance;
• A educ ion in o he heal h ca e claims due o educed non-essen ial p o-
cedu es10;
º Thi d, in e ms o e i emen in es men and sa ings p oduc s, low mo ali y
losses as mo ali y claims a e ma e ially co e ed by e i emen accoun bal-
9 Allianz did an ad hoc co ona i us scena io in mid-Janua y 2020, calib a ed be ween he SARS and
1918 Spanish in luenza his o ical scena ios. Pa aph ased, he conclusions we e ha he o e all impac o
a wo s -case scena io was deemed ma e ial and d i en by inancial ma ke de elopmen s bu he ou come
was wi hin isk appe i e de ined by o he compa able inancial ma ke scena ios. The combined impac
om LH/PC insu ance claims was es ima ed o be ma e ially less han he losses om inancial ma ke s
wi h he g ea es impac in PC an icipa ed om business con inui y.
10 Chang e  al. (2004) commen in he con ex o Taiwan: “A he peak o he SARS epidemic, sig-
ni ican educ ions in ambula o y ca e (23.9%), inpa ien ca e (35.2%), and den al ca e (16.7%) we e
obse ed.” No e ha a lowe up ake o non-essen ial medical p ocedu es may cause highe essen ial p o-
cedu es in he u u e o he ex en ha he non-essen ial p ocedu es we e p e en a i e. In any case, i is
likely ha he backlog o non-essen ial p ocedu es would me ely be delayed a he han elimina ed.

186
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
ances combined wi h a (po en ial) bene i om dec eased longe i y o li e
e i emen p oduc s wi h in- he-money gua an ees.
• The indi ec inancial ma ke impac was igge ed by a subs an ial decline in
consume demand which disp opo iona ely impac ed se ices, a el and eco-
nomic ac i i y in highe densi y u ban a eas, p ima ily in Eas Asia, as well as
inc eased unce ain y a ec ing u u e consump ion and in es men . Es ima es in
2003 a ibu ed a d ama ic impac on jobless a es in he egion. The Wo ld Bank
cu GDP es ima es o Eas Asia by 0.8 pp and he Asian De elopmen Bank
wa ned ha Eas Asia could lose USD 28 bn in ou pu i SARS was no con-
ained (see Table5–1 in Knoble e al. 2004).
Taking he USD 28 bn as an (admi edly in la ed) es ima e o los GDP, he
ex ao dina y inancial impac o SARS would ha e been on he o de o USD
35mn pe a ali y; when con as ed o he lack o economic losses caused by sup-
p ession ac i i ies o seasonal in luenza which has a “no malized” impac o 4mn
a ali ies pe annum, i is ai o conclude ha he impac o SARS’ ex ao dina y
supp ession ac i i ies on GDP and employmen was signi ican .
4.3 1918 Spanish in luenza his o ical scena io
The scope o in ec ed and mo ali ies du ing he 1918 in luenza pandemic clea ly
dwa es he 2002 SARS epidemic; mo e impo an ly, i was also el ac oss he
globe as opposed o being p ima ily in Asia. None heless, he implica ions o he
scena io analyzed p e-Co id-19 would ha e been b oadly he same: insu e s would
be impac ed ma e ially by inancial ma ke s, wi h ela i ely limi ed losses om he
liabili y side o he balance shee .
• Mo ali y and mo bidi y: Acco ding o he Cen e o Disease Con ol and P e-
en ion (CDC 2020), “[ ]he 1918 in luenza pandemic was he mos se e e pan-
demic in ecen his o y…I is es ima ed ha abou 500 million people o one-
hi d o he wo ld’s popula ion became in ec ed wi h his i us. The numbe o
dea hs was es ima ed o be a leas 50 million wo ldwide wi h abou 675,000
occu ing in he Uni ed S a es.”
• Simila o he SARS scena io, in spi e o he highe absolu e numbe o in ec-
ions and dea hs, he impac o he insu ance sec o om di ec cos s was likely
o ha e been limi ed due o a a ie y o ac o s:
º Fi s , he demog aphics o in ec ions and dea hs we e in segmen s which
do no ypically ha e high pene a ion a es in e ms o heal h and mo ali y
insu ance.
• Wi h ega ds o age segmen s, acco ding o he CDC (2020), “[m]o al-
i y was high in people younge han 5 yea s old, 20–40 yea s old, and
65yea s and olde ,” exhibi ing a ‘W-shaped’ excess mo ali y cu e which
di e ed om he ‘U-shaped’ cu e caused by no mal in luenza s ains
187
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
(Taubenbe ge and Mo ens 2006). In e ms o insu ance pene a ion, he
i s and las legs o he ‘W-shape’ (i.e., young child en and he aged) ha e
low mo ali y insu ance pene a ion a es; while he middle leg o he
‘W’ could ha e inc eased mo ali y claims, he geog aphic demog aphics
likely mi iga ed his e ec ;
• Wi h ega ds o he geog aphic dis ibu ion, he g ea bulk o he mo ali-
ies in e ms o absolu e numbe s as well as pe popula ion occu ed in
de eloping con inen s (Table 1) which ypically ha e e y low li e and
heal h insu ance pene a ion a es, po en ially due o an income o weal h
e ec 11;
• Table1 sugges s ha he e is a nega i e co ela ion be ween income and
in ec ion- and mo ali y a es, he eby u he limi ing he impac on
insu ed losses; plausible explana ions o his ela ionship ange om
highe income geog aphies bene i ing om mo e hygienic en i onmen s,
be e gene al heal h s a us due o die and p e en i e ca e and ewe com-
plica ing condi ions.12
º Second, he e a e a a ie y o po en ial mi iga ing ac o s no di ec ly docu-
men ed du ing he 1918 Spanish In luenza bu likely o be associa ed wi h a
new e en should i occu oday:
• Go e nmen p o ision o es ing, isola ion and ea men ac i i ies;
• A educ ion in o he heal h ca e se ices and claims due o educed u ili-
za ion;
11 Enz (2000) pu s o h a model and empi ical e idence o suppo an income o weal h e ec ela ed o
coun y GDP o insu ance pene a ion a es, wi h lowe income coun ies ha ing lowe pene a ion a es.
12 While his is no documen ed o he 1918 Spanish in luenza pandemic, mo e ecen esea ch poin s
in his di ec ion, wi h Ja e e al. (2020), “[o]u indings hus imply ha high-income coun ies a e be e
placed o ace his pandemic, p obably due o a highe a ailabili y o unning wa e and soap, hospi al
beds, quali ied medical pe sonnel and/o echnical equipmen . In con as , low-income coun ies seem
mo e ulne able o COVID-19 since hey a e likely o expe ience highe mo ali y a es han coun ies
wi h be e and mo e accessible se ices.”
Table 1 1918 Spanish in luenza
pandemic: Fall wa e mo ali y
es ima es o selec ed places
Table1 in Pa e son and Pyle (1991)
Con inen Dea hs Dea hs pe 1000
No h Ame ica 0.6 million 5.3
Eu ope 2.3 million 4.8
Asia 19–33 million 19.7–34.2
A ica 1.9–2.3 million 14.2–17.7
La in Ame ica 0.8–1.0 million 8.4–10.6
Paci ic islands 0.09 million –
To al 24.7–39.3 million 13.6–21.7
188
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
• A (po en ial) bene i om li e e i emen p oduc s due o dec eased lon-
ge i y and mo ali y claims ma e ially co e ed by he e i emen accoun
balances;
• The inancial ma ke impac was disp opo iona ely la ge. Acco ding o he s ess
scena ios conduc ed by he Cong essional Budge O ice o es ima e he impac
on he US economy o a possible pandemic (CBO 2006), “[i]n he se e e pan-
demic scena io [ oughly simila o he 1918–1919 Spanish lu ou b eak], oughly
90 million people become sick and 2 million people die in he Uni ed S a es, and
in CBO’s es ima ion, eal GDP would be abou 4–1/4% lowe o e he subse-
quen yea han i would ha e been had he pandemic no aken place. Tha es i-
ma e o he e ec on GDP is compa able o he e ec o a ypical business-cycle
ecession in he Uni ed S a es du ing he pe iod since Wo ld Wa II.” Jonung and
Roege (2006) p o ide es ima es o he GDP impac om a a ie y o di e en
s udies in hei Table4, con i ming he la ge impac on he eal economy.
The ela i ely low impac on mo ali y losses was also he conclusion based on a
de ailed mo ali y model in S acke and Heinen (2006), who concluded ha a Span-
ish in luenza scena io applied o he Ge man insu ance ma ke would gene a e “[a]
ddi ional claims cos s o nea ly €5 billion–a ound 50% o he ma ke ’s o al annual
g oss p o i (be o e policyholde bonuses)—[which] would s ain, bu su ely no
b eak, he Ge man insu ance ma ke .” These highe claims would in many ins ances
be o se by he educ ion in he insu e ’s liabili ies i he co e age is p o ided ia a
e i emen sa ings o in es men policy.
5 Ac ual de elopmen s andimpac on heindus y
5.1 Ac ual de elopmen s
Below is a high-le el assessmen o whe e ac ual de elopmen s a e consis en wi h
o de ia ed om he p e-Co id-19 scena io.
Financial ma ke impac s: Ac ual inancial ma ke impac s ha e been ma e ial
and ema kably in line wi h he p e-Co id-19 scena io analysis; howe e , he e has
been a signi ican su p ise in e ms o he disloca ion o he eal economy, wi h he
inancial ma ke e ec s dampened by ex ao dina y mone a y and iscal policy com-
bined wi h expec a ions o a quick e u n o “no mal.”
In e ms o an ou look, i is highly likely ha Fall and Win e 2020 will see an
inc ease in c edi downg ades and de aul s as he la en bank up cies caused by
con ainmen ac i i ies wo k hei way h ough he sys em. In addi ion, i is also
likely ha u he in e es a e cu s will ma e ialize a e con ainmen ac i i ies a e
elaxed i cen al banks belie e ha u he quan i a i e easing may spu eal eco-
nomic eco e y ia inc eased demand and co po a e in es men . The si ua ion could
become exace ba ed i a second in ec ion wa e, o “W” scena io, we e o eme ge
(Sheine and Yilla 2020).
189
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
Insu ance claims and ope a ions: Ac ual li e and heal h claims and ope a ional
esiliency issues ha e been less ma e ial and in line wi h he p e-Co id-19 scena io
analysis. Howe e , ac ual p ope y and casual y claims ha e p o ided he bigges
su p ise ela i e o p e-Co id-19 scena io analysis as policy wo dings and exclu-
sions a e being challenged, especially o business in e up ion co e age, and he
assump ion o di e si ica ion has been c i ically challenged.
5.2 Impac on alua ions, sol ency a ios, andcapi al managemen
None o he inancial ma ke de elopmen s ha e been a o able, causing lowe asse
alues and highe economic liabili y alua ions, especially o insu e s wi h long-
e m e i emen businesses. In ac , he insu ance indus y a ed much wo se han he
o e all s ock ma ke : o e a 1yea ho izon ending in ea ly May 2020, he Eu os oxx
insu ance index ell −23.9% while he Eu os oxx agg ega e index ell only −14.9%.
This nega i e ela i e pe o mance may seem pa adoxical gi en he ela i e s abil-
i y o accoun ing ea nings o he sec o ; howe e , i can be explained by looking a
ma ke -consis en alua ions as opposed o accoun ing ea nings (see Wilson 2015,
o a discussion o insu e alua ions du ing c isis).
Financial ma ke u bulence has also ad e sely impac ed insu e s’ sol ency
a ios. Focusing on Eu opean insu e s unde Sol ency II, Deu sche Bank (2020) says
ha his is he “[m]os ola ile qua e on eco d—We es ima e ha ma ke mo es
in 1Q20 ha e cos he sec o c. 18pp in agg ega e, d i en by lowe bond yields
(−8pp), wide c edi sp eads and a all in equi y ma ke s (−6pp each) as Co id-19
sp ead wo ldwide.” Deu sche Bank es ima es a e in he middle o he analys ange
o inancial ma ke impac , wi h UBS (2020) coming in a −16pp and JPM (2020)
a −25 pp impac on Eu opean insu e s’ sol ency a ios unde Sol ency II (a e
excluding + 2pp o ne capi al gene a ion o he indus y). The sol ency a io is he
amoun o an insu e ’s a ailable sol ency capi al unde Sol ency II, he so-called
own unds, di ided by i s Sol ency Capi al Requi emen (SCR).13
Looking a indi idual company esul s, mos o he impac on sol ency came
ia educed own unds as opposed o an inc eased SCR.14 In gene al, managemen
ac ions du ing a c isis can only ma e ially educe SCR bu canno eplace los own
unds which ake a long ime and much e o o gene a e and e ain, ein o cing he
13 See he Sol ency II Di ec i e (EU Di ec i e 2009/138/EC), A icles 87–89 and 100–108: Sol ency
II own unds consis o basic own unds and ancilla y own unds. Basic own unds a e calcula ed as he
excess o liabili ies o e asse s, plus subo dina ed liabili ies. Ancilla y own unds a e “i ems o he han
basic own unds which can be called up o abso b losses” (A icle 89 o he EU Di ec i e 2009/138/
EC). The SCR unde Sol ency II is he amoun o basic own unds an insu e needs o hold in o de o
i s su i al p obabili y o be a leas 99.5%. In o he wo ds, he SCR ep esen s he 99.5% Value a Risk
o he basic own unds. Insu e s can ei he use a s anda d o mula o an in e nal model o calcula e he
SCR. Rega ding he speci ic opic o his pape , i can be no ed ha he s anda d o mula o li e insu e s
includes a ca as ophic shock scena io ha was de eloped wi h a ocus on pandemic isk (see K au and
Rich e 2014).
14 In he case o Allianz’s Q1:2020 published inancial esul s, he e was a dec ease in Sol ency II own
unds o EUR −7.9 bn as asse alues ell and liabili y alues inc eased, compa ed o a capi al inc ease o
EUR + 1.8 bn e lec ing he mo e unce ain c edi en i onmen and being close o he gua an ees.
190
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
message ha ini ial esilience o insu e s is mo e powe ul han con ingency plans
du ing he c isis.
In spi e o his decline, he indus y emains well capi alized o mee policyholde
obliga ions acco ding o analys s, wi h analys es ima es pu ing he indus y sol-
ency a io be ween 180% (JPM) and 190% (Deu sche Bank). UBS (2020) s a es,
ha “[d]espi e high ola ili y, … capi al bu e s/ a ios emain a adequa e le els,
wi hin insu e s’ a ge anges and no a le els close o impai ing di idends. Gi en
he sec o is he 4 h la ges di idend con ibu o o Eu opean equi ies and wi h di i-
dend cu s in o he inancial sec o s— his is a key conclusion.”
5.3 An unexpec ed accumula ion ingene al insu ance
In con as o he inancial ma ke impac , he ac ual impac on p ope y and casual y
claims did subs an ially su p ise ela i e o he p e-Co id s ess scena io, shi ing
he ocus quickly om he asse o he liabili y side o he balance shee (Au ono-
mous 2020). The e a e wo oo causes o his unexpec ed de elopmen : i s , he
in e p e a ion o pandemic exclusions and o he e ms and condi ions limi ing pan-
demic isk in gene al insu ance lines is being challenged and, second, accumula ion
scena ios in special y lines did no ully an icipa e he b oad impac o he pandem-
ic’s supp ession ac i i ies.
Ini ial es ima es pu he Co id-19 pandemic in he ange o a mid- o la ge-size
na u al ca as ophe in e ms o po en ial insu ed p ope y and casual y claims.
Acco ding o Au onomous (2020), “[i]ndus y insu ed loss es ima es ha e shi ed
om ‘mode a e hu icane’ equi alen o a po en ial ull e- un o peak ca as ophe
yea s o 2011 o 2017 (> $100bn). … [W]e se a ange o $31 [ o] 86bn (1.3–3.6%
o global p emiums) o Co id-19 losses …The na u e o hese losses is unp ec-
eden ed om a global accumula ion pe spec i e and in he ‘ha d o model’ bucke .”
Willis Towe s Wa son (2020) pu he mode a e o se e e claims es ima es in a simi-
la ange a USD 32–80 bn o he US and UK ma ke s. Howe e , a his ea ly da e,
he ange o unce ain y is e y la ge, spanned by op imis ic scena ios (USD 11 bn,
WTW 2020) o wo s -case scena ios (USD 140 bn, WTW 2020). Looking a he
indus y scena io es ima es om WTW (2020) in hei Fig.10, he mode a e case
claims o USD 38 bn a e p edominan ly d i en by business in e up ion (USD 18.5
bn o 49%, o which app oxima ely 10% a e due o e en cancela ion).
To pu hese losses in o con ex , Swiss Re (2020) es ima es ha na u al ca as o-
phe insu ed losses om wo o he wo s yea s in he las decade o aled USD 144
bn in 2017, d i en by hu icanes Ha ey, I ma and Ma ia, and USD 139 bn in 2011,
p ima ily om a combina ion o he ea hquakes in Japan and New Zealand and
Thai looding. While unpleasan and unexpec ed, hese expec ed claims lie wi hin
he indus y’s capaci y.
5.4 Business in e up ion
Gi en i s high po en ial impac , business in e up ion insu ance dese es mo e
discussion. Business in e up ion insu ance gene ally p o ides co e age o

191
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
inancial losses sus ained as a esul o an in e up ion caused by p ope y dam-
age; non-p ope y damage business in e up ion co e age o ex ensions a e no as
p ominen ly pu chased and would gene ally ha e speci ic sublimi s i pu chased.
Pandemics a e gene ally hough o ha e been excluded unde p ope y busi-
ness in e up ion insu ance o ex ensions as he e is no di ec p ope y igge . In
coming up wi h hei ini ial es ima es, Au onomous (2020) s a es ha , “[ ]heo e i-
cally, he indus y’s … economic losses should be low gi en he ac ha , o he
mos pa , hey did no unde w i e ‘pandemic’ dis up ion. Howe e , he deg ee
o which co e age may ha e been unwi ingly p o ided is going o be se e ely
es ed.” The e ec i eness o business in e up ion policy wo dings in limi ing
losses is being challenged (WTW 2020), in pa icula in e p e a ions o any limi-
a ions o physical damage igge (s), explici pandemic exclusions, and co e age
o named pe ils only.
The po en ial impac o challenges o policy wo dings could be e y la ge and
seems o ha e been unde es ima ed by he insu ance indus y. See o ins ance
Ralph (2020), GDV (2020a): While i was epo ed ha add-ons o s anda d busi-
ness in e up ion policies speci ically co e ing in ec ious diseases we e a e, a
deba e eme ged a ound he ques ion o whe he ce ain ypes o non-p ope y
damage business in e up ion insu ance, in pa icula policies co e ing es au-
an s o ho els, p o ided co e age in he case o a gene al lock-down.
Policy design a ies ac oss hese co e ages, so ha gene al s a emen s a e no
possible. Bu he e a e examples ha indica e a signi ican need o imp o emen
o wo ding. In Ge many, o example, a common e sion o non-p ope y busi-
ness in e up ion co e age e e s o a lis o in ec ious diseases in he Ge man
In ec ion P o ec ion Ac (“In ek ionsschu zgese z,” I SG). While he insu ance
indus y a gues ha he Co id-19 losses a e only co e ed i he cu en e sion o
ha lis has explici ly become a pa o he con ac (see GDV 2020a), he a gu-
men can also be made ha such losses a e au oma ically included as hese con-
ac s e e o a dynamic lis (see, e.g., Bu gha d 2020). As he co ona i us was
only added o he lis a he end o Janua y 2020, he cou s’ posi ions in his legal
con o e sy migh ha e signi ican impac on he amoun o losses ul ima ely paid
as a consequence o he Co id-19 lock-down in Ge many.
Some also a gue ha hese co e ages we e mean o si ua ions whe e an
indi idual es au an has o close because an employee has con ac ed an in ec-
ious disease and ha a lock-down as a gene al p e en ion o con ainmen meas-
u e would no be subjec o such co e age (see o ins ance Ralph 2020, o GDV
2020a). Policies may ha e been w i en wi h only he indi idual scena io in mind,
bu appa en ly con ac wo ding in many cases lea es oom o legal in e p e a-
ion. Clea ly, o u u e co e age, policy wo ding mus be imp o ed in his a ea.
One can only specula e abou why he accumula ion isk associa ed wi h a pan-
demic in non-p ope y damage business in e up ion and ela ed p oduc s seems o
ha e been unde es ima ed. In addi ion o some o he beha io al biases men ioned
ea lie , ano he po en ial eason could be a “silo men ali y” in unde w i ing, which
would be consis en wi h he pe cep ion ha pandemic isk as a sou ce o accumula-
ion isk was an issue in li e, bu no so much in p ope y and casual y insu ance.
192
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
5.5 O he a eas o “su p ise”: public pe cep ion and egula o y es ic ions
Wi h he bene i o limi ed hindsigh , wo o he a eas may be cha ac e ized as “su -
p ises” ela i e o he ypical p e-Co id-19 scena io analysis. The i s has o do
wi h he public’s pe cep ion o he insu ance indus y. No mally, he pe cep ion o
he insu ance indus y ends o imp o e ollowing a na u al ca as ophe wi h la ge
insu ed losses. Howe e , he pe cep ion o he indus y pos -Co id-19 is likely o
su e o wo easons: i s , some poli icians may eso o socially cha ged language
o jus i y he a emp o o ce e oac i e co e age o business in e up ion claims,
e en in he ace o clea con ac ual exclusions. Second, he unce ain y su ounding
he in e p e a ion o some, less clea exclusions will likely lea e a ail o li iga ion
as well as (poli ically cha ged?) conduc - ela ed cases as he policies may no ha e
pe o med nei he as cus ome s no insu e s expec ed.
Also, na ional and in e na ional egula o s ha e been a quicke o impose capi al
managemen es ic ions on, o example, bank and insu e di idends and sha e buy-
backs.15 In pa his p eemp i e ac ion was o ensu e inancial sys em s abili y bu
also in pa o achie e a “socially accep able isk sha ing” o he pandemic’s impac .
Acco ding o S o onos and V baski (2020), hese “ es ic ions may con ibu e o a
mo e socially accep able sha ing o he o e all cos s o he pandemic” (emphasis
added). These es ic ions we e no limi ed o banks. Jones (2020) in Reu e s epo s
ha EIOPA, he Eu opean insu ance supe iso , said ha , “[i]nsu e s and einsu e s
in he Eu opean Union should empo a ily suspend di idends and sha e buybacks,
and conside pos poning bonuses as well o ensu e con inui y in se ices du ing he
co ona i us pandemic.”
6 Lessons lea ned
6.1 Fu u e pandemic isk co e age
Based on he expe ience om Co id-19, he e seems o be b oad consensus in he
insu ance indus y ha he consequences o a pandemic canno be co e ed in hei
en i e y by he p i a e insu ance ma ke (see, e.g., GDV 2020b). This has aised he
issue o in oducing public p i a e pa ne ships ha can p o ide p o ec ion agains
he inancial impac o u u e pandemics. Fo ins ance, wo p og ams ha ha e been
sugges ed in he US, a e he Business Con inui y P o ec ion P og am (BCPP), and
a Pandemic Risk Insu ance Ac (PRIA). The la e p oposal is based on he Te o -
ism Risk Insu ance Ac (TRIA) and would ha e he insu ance companies ake he
i s loss, wi h a ede al backs op co e ing losses exceeding a h eshold (see, e.g.,
Scla ane 2020). While his migh be he igh isk sha ing mechanism o e o ism
isk, i s applica ion o pandemic isk can cause se e e incen i e dis o ions and hus
15 S o onos and V baski (2020) p esen an o e iew o supe iso y ini ia i es by ju isdic ion in hei
Table2.
193
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
ex e nal mo al haza d when he go e nmen has an in e es in ex ending con ain-
men measu es, as long as he esul ing cos s a e co e ed by he insu e s.
The BCPP p oposal, which was de eloped join ly by he Na ional Associa ion
o Mu ual Insu ance Companies (NAMIC), he Ame ican P ope y Casual y Insu -
ance Associa ion (APCIA) and Independen Insu ance Agen s & B oke s o Ame -
ica, Inc. (Big “I"), a oids his p oblem. Unde his p og am, simila o he Na ional
Flood Insu ance P og am (NFIP), he insu ance indus y would no assume he isk
bu help adminis e ing p o ec ion on behal o he go e nmen , which would p o ide
he ac ual suppo h ough he Fede al Eme gency Managemen Agency (FEMA).
Acco ding o he p oposal, businesses could choose hei desi ed le el o p o ec-
ion o h ee mon hs’ elie o up o 80% o pay oll (excluding highly compensa ed
employees), employee bene i s and ope a ing expenses. Ra es would be calcula ed
as a pe cen age o he pay oll and expenses (see NAMIC 2020). Paymen s unde
he BCPP would be au oma ically paid in case o a ede ally decla ed public heal h
eme gency. The unambiguous igge combined wi h he p ede ined amoun s gua -
an ees as paymen wi hou any claims adjus men needed. This choice o igge
excludes he po en ial o (in e nal) mo al haza d, bu also lea es he insu ed wi h
some basis isk esul ing om he possibili y ha con ainmen measu es a e only
o de ed on a local le el.
As ano he example, he Ge man Insu ance Associa ion’s p oposal (GDV 2020b)
o a pandemic suppo sys em highligh s he indus y’s expe ise and he ad an-
ages o using exis ing cus ome ela ionships o a as and e icien suppo pay-
men p ocess in u u e pandemics. A guing ha he inancial consequences o a pan-
demic canno be insu ed in he p i a e sec o , he GDV (2020b) g een pape also
emphasizes he impo ance o s ong go e nmen in ol emen in inancing a sup-
po sys em. The pape dis inguishes be ween wo models, one wi h la a e le ies
and la bene i s (model A), and ano he one ha would be mo e isk-based (model
B). Acknowledging he po en ial ad e se selec ion p oblem associa ed wi h a sys em
ha is no isk-o ien ed, i is a gued ha model A would ha e o be manda o y. As
much as his a gumen is s aigh o wa d, his is an in e es ing p oposal in so a as
he Ge man insu ance indus y in a simila discussion abou whe he lood insu ance
should be made manda o y has s ongly a gued agains a compulso y sys em (see
Schwa ze and Wagne 2007).
Gene ally, as long as a suppo sys em is no designed o be manda o y, ake-
up can be a key ques ion. Conside ing he gene ous go e nmen suppo ha was
p o ided du ing he Co id-19 c isis, cha i y haza d, o he “Sama i an’s dilemma,”
migh become an issue: I businesses an icipa e signi ican ad hoc help om he
go e nmen , his can c owd ou olun a y p o ec ion p og ams (Raschky e  al.
2013). The abo e-men ioned unce ain y abou co e age unde cu en policies in
he Co id-19 c isis migh add o a eluc ance in he demand o pandemic insu ance.
Any p o ec ion p og am o u u e pandemic losses will ha e o be highly anspa -
en wi h unambiguous policy igge s and should be communica ed ac i ely o he
po en ial insu ed.
Rega dless o he ac ual ehicle ha is used o p o ide elie o business in e -
up ion losses o whe he he go e nmen has a ole in a p o ec ion p og am o no ,
pandemic ca as ophe (ca ) bonds may be used o suppo inancing such elie . Fo
194
The Gene a Risk and Insu ance Re iew (2020) 45:171–199
ins ance, he Ge man Insu ance Associa ion’s p oposal o a pandemic suppo sys-
em (GDV 2020b) sugges s o in ol e he capi al ma ke s ia such bonds.
Ca bonds can help imp o ing he e iciency o isk inancing (see, e.g., Dohe y
and Rich e 2002; Nell and Rich e 2004). Among he easons o en ci ed a e ull
colla e aliza ion and he po en ial o a as claims p ocess. Pandemic ca bonds a e
no a new concep . Du ing he Co id-19 c isis, he Wo ld Bank’s pandemic ca
bonds we e igge ed, p o iding unds o In e na ional De elopmen Associa ion
(IDA) coun ies h ough he Wo ld Bank’s Pandemic Eme gency Financing Facil-
i y (PEF) in o de o help hese coun ies in hei esponse o he pandemic (E ans
2020).16 Howe e , hese bonds we e hea ily c i icized o he complexi y o he
igge mechanism and he esul ing delay in paymen s (Bake 2020; Ha wig e al.
2020; S ohecke 2020). Reac ing o his c i icism, he Wo ld Bank which had ini i-
a ed he PEF speci ically o se up a way o ge ing unds o poo coun ies quickly,
has now decided no o con inue he p og am wi h a second i e a ion ha had been
expec ed o 2020 (Hodgson, 2020).
While he complexi y issues associa ed wi h he Wo ld Bank’s pandemic ca
bonds may ha e o do wi h he speci ic ocus o he PEF, simple and anspa en
igge s will gene ally be necessa y o ensu e accep ance o such ins umen s. In
o de o limi incen i e dis o ions, pa ame ic igge s will be help ul (Dohe y and
Rich e 2002; MacMinn and Rich e 2018). As we ha e seen, he ques ion o an
adequa e de ini ion o igge s has been a p oblem o many insu ance p oduc s as
well. I , howe e , his p oblem can be sol ed in a pandemic suppo sys em o non-
p ope y damage business in e up ion losses as discussed abo e, he e is no eason
why i would no be possible o use hese o simila igge s in designing a ca bond
ha helps inancing his suppo .
A s anda d eason o he use o ca bonds is ha hey a e pa icula ly a ac i e
om an in es o ’s pe spec i e, assuming he secu i ized ca as ophe isk has low
co ela ion wi h ma ke isk (see Li zenbe ge e al. 1996). This a gumen is o lim-
i ed alidi y o ex eme ca as ophes (Gü le e al. 2016) and may hus be ques ion-
able o pandemic ca bonds (no e, howe e , ha du ing he Co id-19 c isis, s ock
ma ke s ebounded ela i ely as ). S ill, such a bond, in pa icula a ca bond issued
by he go e nmen (so e eign ca bond) could be an e icien isk alloca ion ool o
highly co ela ed losses: I p o ides a means o a omize he isk and ex an e o ganize
he dis ibu ion o losses ac oss a la ge numbe o indi iduals. This, hough, is only
possible i he ca bond is a ailable no jus o ins i u ional in es o s, bu also in
pa icula o indi idual in es o s. In o de o make his possible, i would be ad is-
able o limi an indi idual’s loss, o ins ance o he amoun o he coupon. In addi-
ion, hese in es men s could be ax-ad an aged in o de o se u he incen i es.
16 Secu i ies designed as ins umen s o hedge ex eme mo ali y changes o li e insu ance books o
business ha e been issued o a while, s a ing wi h Swiss Re’s Vi a Capi al ansac ion in 2003 (see, e.g.,
MacMinn and Rich e 2018).