How to insure a pandemic

If you ever played Tetris during the 80s or 90s, when the game took the world by storm, you knew that no matter how good you got at it, the game would eventually get the better of you. You started off by neatly stacking your basic blocks, but as the speed of the game picked up, your screen soon got filled with mismatched blocks that didn’t fit and it began to dawn on you that you just crossed that point of no return. Before you knew it, it was game over.

The speed at which Tetris kept throwing those blocks at you, made it impossible to manage. The Covid-19 pandemic entered the stage in a somewhat similar fashion. It was an epidemic as it emerged. Like many we’ve seen before, we thought of it initially in local terms, as something manageable. We soon realized that it was spreading too fast and at dire consequences. It didn’t take long before it became a pandemic. The word itself comes from Greek (‘pan’ meaning all and ‘demos’ meaning people). It spread fast and worldwide and was an outbreak that paralyzed and harmed our health, families, countries, and economies. Many businesses went bankrupt and as a result, many people lost their jobs.

Unlike Tetris, thankfully, it is possible to manage. However, what it highlighted are the enormous challenges that are involved in insuring it. In addition, it also opened up new paths to future insurance solutions that could cover such global events of enormous proportions.

Mind the gap

The way insurance usually works is that many people pay in a comparatively small premium so that a few affected get a lot of money when a loss happens. But the fundamental mechanism of risk pooling and redistribution fails to work when a systemic risk is present the effects of which are felt throughout the economy, as is the case with the pandemic. Pandemic-induced property and business continuity risk is unique given its potential to impact almost all policyholders simultaneously and over an extended period of time.

When talking about pandemics and insurance, we often hear the phrase protection gap. A protection gap is the share of uninsured losses in total economic losses. Because of its systemic characteristics, the insurability of pandemics often focuses on commercial P&C business, business interruption (BI) and business closure protection gap, in particular.

To put things into perspective, according to the Geneva Association’s recent report, P&C insurers globally generate an annual premium income of about $1.6 trillion, while the global loss in GDP is estimated to amount to $4.5 trillion in 2020.

P&C insurers would have to collect $1.6 trillion across all lines of business for almost 3 years in order to cover the estimated GDP loss for 2020. In addition, only a tiny fraction (estimated $25-30 billion) of the world’s P&C premium base is linked to BI coverage. The global P&C insurance industry would have to collect BI premiums for at least 150 years in order to absorb the estimated global output loss from the pandemic.

allianz insurance pandemic

To illustrate things further, losses associated with a hurricane, for example, are local and dissipate over hours or days. Pandemic-induced BI losses have the potential to impact all policyholders, regardless of their location and at the same time, covering a stretch of months or even years.

In addition, the economic severity connected with a pandemic depends on a particular government’s response to the pandemic. Such economic losses, linked to politics and political decisions, are difficult to model and measure.

Solutions for the future

Of course, many solutions are conceivable in order to close this protection gap—including the states organizing insurance on their own. However, it would certainly make sense to develop an overarching approach in cooperation between the insurance industry and the respective state. The reason is twofold: insurers know how to make payouts quickly and smoothly. In addition, existing customer relationships facilitate identity verification.

This is something that Allianz SE Board Member Klaus-Peter Röhler reiterated in his op-ed published recently in VersicherungswirtschaftHEUTE.

Joint discussions between the insurers and the governments have prompted four key questions that need to be addressed: which insurance model is the more appropriate solution—the capital collection model or an insurance model? Should such a coverage system be voluntary or compulsory? What is the appropriate trigger to bring this system into effect? And finally: should a solution be European or national in nature?

allianz klaus peter roehler
Klaus-Peter Röhler
Allianz advocates the development of a special pandemic cover for all countries in Europe, in cooperation with the insurance industry and governments. A special cover offers the possibility of comprehensive coverage for many companies. In the event of a defined pandemic, insurers would pay benefits up to a defined amount, whereby the calculation could be based, for example, on the assumed probability of a pandemic recurring. However, such a premium would be prohibitively high, as it would reflect the full risk situation. If the insured are able to pay reduced premiums for this coverage already, the state could subsidize them. The state can—if necessary—also define even more far-reaching state benefits above the defined level. Röhler narrows down the proposed solution:

1. Explore the benefits of a compulsory solution 

From Allianz’s perspective, a possible compulsory solution may be more beneficial because "a voluntary insurance solution would not achieve real blanket coverage—instead, there would be a kind of patchwork quilt. One consequence might be that the state would be put under pressure to intervene, even—and particularly—in cases where there was no insurance coverage at all. That would disadvantage those who had taken responsibility themselves and already arranged precautions. On top of that, with a voluntary solution it's more difficult to keep the premiums affordable. That is something we would like to avoid. A mandatory solution, nevertheless, would have to ensure that there was lean, efficient coverage and that considerations of cost-effectiveness were not overlooked," says Röhler.  

2. Focus only on pandemics initially

Röhler also emphasized that such a cover should initially be focused on pandemics only and exclude other systemic risks such as terrorist attacks, cyberattacks or similar, since the pricing could become extremely complex if several risks are combined in a model.

3. Define a clear trigger

Another important consideration for Allianz is to define a clear and an easy-to-understand trigger upon which this pandemic cover could come into effect, which would enable claims to be made quickly and in a standardized manner.

4. Implement on a national level

"This approach might be embedded within an overarching European framework of minimum standards for all Member States—which would certainly make good sense in view of how closely intermeshed European economies are with one another. But then, implementation should take place at the national level and must be adapted to each country-specific context. After all, laws to cushion the consequences of a pandemic, such as Germany's provisions for government-subsidized shortened work schedules, differ from one country to another," says Röhler.

Allianz sees its role in flexibly approaching and supporting the model each country chooses because the insurance industry has the expertise and the resources to manage payouts. "So at Allianz, we're flexible about approaches so we can provide each government with the best possible support in carrying out its own chosen model. What's important is that the government and the insurance industry should quickly find a way together that leads to our goal of offering clients meaningful support fast during the next pandemic," added Röhler.

The insurance industry is currently working on pursuing a solution throughout Europe. Governments are understandably currently focused on combating second and third Covid-19 waves while organizing their national vaccination campaigns. However, insurers warn that it’s important to define the necessary framework conditions for the respective pandemic solution as quickly as possible. Only when this framework is in place can the insurers begin to develop a product. "For our home market in Germany, I can say that at Allianz, we would rather get that process going today than tomorrow," concludes Röhler. 

The Allianz Group is one of the world's leading insurers and asset managers with more than 126 million* private and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 706 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage nearly 1.7 trillion euros** of third-party assets. Thanks to the systematic integration of environmental, social and governance criteria in our operations, business processes and investment decisions, we continue to be recognized as among the sustainable insurers in the Dow Jones Sustainability Index (September 23, 2022). In 2021, over 155,000 employees achieved total revenues of 148.5 billion euros and an operating profit of 13.4 billion euros for the group.

These assessments are, as always, subject to the disclaimer provided below.

*Including non-consolidated entities with Allianz customers.
** As of September 30, 2022

Press contacts

Susanne Seemann
Allianz SE
As with all content published on this site, these statements are subject to our cautionary note regarding forward-looking statements:

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