Government insurance for business interruption losses from pandemics: An evaluation of its feasibility and possible frameworks

• DOI: http://doi.org/10.1111/rmir.12162
• Author: Robert W. Klein,Harold Weston
• Published date: 01 December 2020
• Date: 01 December 2020

Received: 19 November 2020

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Revised: 8 December 2020

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Accepted: 9 December 2020

DOI: 10.1111/rmir.12162

PERSPECTIVE

Government insurance for business

interruption losses from pandemics: An

evaluation of its feasibility and possible

frameworks

Robert W. Klein |Harold Weston

Department of Risk Management and

Insurance, Georgia State University,

Atlanta, Georgia, USA

Correspondence

Robert W. Klein, Department of Risk

Management and Insurance, Georgia

State University, 35 Broad St, Atlanta,

Georgia 30303, USA.

Email: rwklein@bellsouth.net

Abstract

Many businesses have suffered severe economic losses

due to the COVID‐19 pandemic. Because property

business interruption (BI) policies generally do not

cover losses caused by a virus, this has led to proposals

for some form of government program that would

provide this coverage. We explain why private BI

pandemic insurance on a broad scale is infeasible.

Arguably, BI pandemic insurance has substantial po-

sitive externalities and this has implications with re-

spect to the desirability of government provision of this

coverage and its financing. Our paper considers the

goals of a government BI pandemic insurance program

and the challenges it would face with respect to its

design and implementation and how they could be

addressed. In this context, we evaluate current propo-

sals for such a program, including legislation currently

being considered by the Congress. We conclude that

creating such a program requires thorough and careful

consideration of its features and the tradeoffs involved

with its structure. The essential question for policy-

makers is whether the best possible program would be

in the public interest and increase social welfare.

Further, political considerations will likely influence

Risk Manag Insur Rev. 2020;23:401–440. wileyonlinelibrary.com/journal/rmir

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© 2020 The American Risk and Insurance Association

the design of any program in ways that would make it

less efficient and possibly less equitable.

KEYWORDS

business interruption insurance, government insurance,

pandemics, public goods

1|INTRODUCTION

The COVID‐19 pandemic has caused business closures and restrictions, supply chain disrup-

tions, decreased demand for some firms' goods and services, and financial catastrophe for many

terminated workers and small businesses, resulting in widespread economic losses. Firms have

been generally unsuccessful to date in recovering their COVID‐19 losses through their property

business income interruption (BI) insurance policies.

1

This is primarily because losses from

COVID‐19 have not resulted from actual physical damage as required by these policies, as most

court decisions have concluded as of this writing. Standard insurance economic theory sug-

gests, and most insurers contend, that it is infeasible for them to provide BI coverage for

pandemics.

2

Consequently, there is strong interest in creating a government insurance program

(that could include participation by private insurers) that would cover businesses' expenses

including wages, and possibly replace lost net income arising from future pandemics.

One proposal for such a program is the Pandemic Risk Insurance Act of 2020 (PRIA),

introduced in the Congress as H.R. 7011, to create a public–private insurance program, labeled

the Pandemic Risk Reinsurance Program (PRRP), (similar to the program established by

Terrorism Risk Insurance Act (TRIA), that would provide BI insurance for pandemics with

participating private insurers retaining 5% of covered losses above a deductible.

3

We review the

structural features of the program contemplated by PRIA and consider whether a

public–private pandemic risk insurance program might borrow from the structures of other

existing catastrophe insurance programs such as the National Flood Insurance Program (NFIP)

or the federal crop insurance program. Any proposal for BI pandemic insurance, with or

without the participation of private insurers, raises fundamental issues regarding whether such

insurance is feasible and would increase social welfare.

We conclude that the current PRIA draft is seriously flawed in its design to achieve the

intended goals for financial protection and financing. Some flaws are easily corrected because

the bill has incorrect assumptions about BI insurance law—specifically insurance coverage,

regulations, and insurer finances. Payroll protection is discretionary now for BI insurance.

PRIA assumes it is included. If the goal is to provide income protection for employees, then any

pandemic BI insurance plan must require coverage for payroll, making it more comprehensive

and more expensive. If however, the goal instead is to preserve a business only, so that when

the pandemic is contained or ends the business can resume and hire back workers, then the

1

The University of Pennsylvania Law School has an on‐line tracker of the disposition of this litigation, available at

https://cclt.law.upenn.edu/judicial-rulings/.

2

See Kuhlmann (2020), for a discussion of why most insurers believe that pandemic income losses are uninsurable.

3

The text of H.R. 7011 is available at https://www.congress.gov/bill/116th-congress/house-bill/7011/text?q=%7B%

22search%22%3A%5B%22HR+7011%22%5D%7D&r=1&s=1.

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program fails to solve the problem of protecting most people. This would require a new (and

improved) Payroll Protection Program and supplemental unemployment insurance. This

technical question underlies the conceptual economic gap in whether PRIA is a flawed finance

mechanism or a flawed public welfare program. Another correctable flaw in PRIA is its failure

to separate claims handling under the program from state claims statutes and bad faith laws.

Other flaws are harder to overcome based on a misunderstanding of insurance economics

and general economics. One fundamental structural problem with PRIA is that, while the

amount of risk that would be assumed by private insurers under the bill might seem small,

pandemic BI risk is sui generis different from other catastrophic risks in that it is countrywide

and worldwide. In contrast, floods, hurricanes, earthquakes, and (so far) crop failures are

widespread but not countrywide (excepting small countries). Hence, pooling and diversification

of BI pandemic risk is much more difficult than it is for other catastrophic risks.

Further, catastrophes are of short duration, typically hours or days (though their effects

have longer duration), whereas pandemics last months or years (Smith, 2017, p. 488). Ad-

ditionally, we show that even what would seem to be relatively low risk sharing by private

insurers in a government program could be problematic for many in terms of the potential

strain on their surplus. Moreover, insurers' planning for an event that might be 50–100 years

away creates unique capital accumulation, risk financing, and pricing problems that current tax

law and insurance regulatory practices fail to address but this can be corrected.

4

Pandemic business income protection raises the broader economics and policy question of

whether such protection is a public good, owed to all, or a private good with substantial positive

externalities. This question is linked with the question of whom or what this insurance should

protect. To put it more bluntly, should BI pandemic insurance protect labor, or capital, or both?

The answer to that question informs whether private insurance for pandemic BI expenses and

losses on a broad scale is at all feasible and the role that the government should play in

providing or financing it, if any. We acknowledge that private insurance for some portion of the

economic losses from a pandemic may be possible.

If the goal is to provide income protection for employees, then any pandemic BI insurance

plan must require coverage for payroll, making it much more comprehensive and expensive. If

the goal of the program is to preserve a business only, then it would fail to protect most people.

Further, if BI pandemic insurance has significant positive externalities beyond a firm and its

employees, does this commend some form of government participation and financing to

achieve a socially optimal supply of such insurance?

If such protection is not a public good, and instead is a personal protection scheme available

to those who buy it (like life insurance or property BI insurance) to replace earnings and cover

expenses if calamity strikes an individual or firm, then the problem is not public protection but

public financing. This is a problem that arises with other types of insurance for catastrophes

such as crop failures and floods and even terrorism, which sufficient federal money can solve,

no matter how badly a program is designed. However, this problem is much greater for pan-

demic income losses that can considerably exceed the losses from other catastrophes, as de-

monstrated by COVID‐19.

4

Floods are typically classified as 100‐, 200‐, or 500‐year events, but that goes to probabilities translated into ex-

pectancies, not actual intervals. Geologists also present earthquake risks in intervals based on geological evidence of

past earthquakes. While this is more appropriate to use to evaluate the insurability of pandemics, again the difference is

that earthquakes are local or regional, not continent‐wide (mindful that resulting tsunamis may causes losses far away

too), so an earthquake in the Pacific Northwest is not correlated with an earthquake in other areas of the U.S or the

world.

KLEIN AND WESTON

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