Zach Finn, Butler University
24 June 2020USA analysis

Insurance faces a war on two fronts

Well, I did it—I reached the bottom of the internet. My Facebook friends have delighted or annoyed me to their fullest extent and I have streamed all the content. I had no choice if you think about it. I am a college insurance and risk management professor and it is summer. Almost everything is closed because of COVID-19 and the students are on summer break.

I have long been arguing that the economic consequences that would result from a national shutdown to flatten the curve against COVID-19 would be dire. I was not against a national shutdown (at the time), but I knew that these acts of civil authority would be largely excluded under most business interruption insurance policies.

I knew the impact of the world’s largest uninsured business interruption claim would be ruinous to the US and the global economy, and impair our ability to sustain a shutdown without the related mortality losses that come from rapid and dramatic economic decline.

A good risk manager doesn’t identify problems and risks without offering solutions, so on March 26 I published an outline for COVID-19 Business Interruption Relief Legislation. I believed, and still believe, that we need to create a prospective public-private re/insurance backstop at the federal level for pandemics, viruses and related business interruption losses from shutdown by civil authority.

I even had what I still think is a reasonable plan for the insurance industry to provide limited business interruption coverage for the current coronavirus outbreak. This would be in exchange for securing statutory waivers of liability for losses related to reopening, and as a way to negate the need for costly coverage litigation from and against policyholders.

I had expected to be actively working with the insurance industry and the US Congress on the creation of a Pandemic Risk Insurance Act by now. Congress has done its part with the introduction of Representative Carolyn Maloney’s proposed bill HR 7011, the Pandemic Risk Insurance Act of 2020 (PRIA). I wholeheartedly support this bill.

Then the insurance industry did something I did not expect, delivering a blanket statement that pandemics are uninsurable.

“Pandemics simply are not insurable risks; they are too widespread, too severe and too unpredictable for the insurance industry to underwrite,” said Charles Chamness, president and chief executive officer of the National Association of Mutual Insurance Companies (NAMIC).

I know and have great respect for Chamness and the fine folks at NAMIC. NAMIC’s role is to understand and reflect the views of its members and advocate on their behalf. NAMIC and other insurance trade associations, such as the Insurance Information Institute, have done an excellent job representing their members and educating legislators and consumers about insurance, insurability and numerous other important issues related to the pandemic.

However, it is important to unpack that last part of NAMIC’s statement: “… for the insurance industry to underwrite”.


What is or is not insurable is a matter of perspective and motives. As a risk manager, I was educated and trained to believe that anything (that is not illegal) is insurable, if you are willing and able to pay the premium. There have been many events and perils in my career—Y2K and E&O, 9/11 and terrorism, Katrina and flood, salmonella and product contamination—which created exposures that some deemed “uninsurable” or “under-insurable” due to the insurance industry’s inability to underwrite the risk at the time.

To me life is a combination of risks and opportunities. I don’t agree that anything is uninsurable. You may need to adjust your (profit) motives, but there is always a way. In fact, as I streamed Jurassic Park, while waiting for risk managers, agents, brokers and re/insurers to get on the same page regarding the insurability of pandemics, I thought Jeff Goldblum’s character, Dr Ian Malcolm, said it best: “If there’s one thing the history of evolution has taught us, it’s that life will not be contained.

“Life breaks free, it expands to new territories, and crashes through barriers painfully, maybe even dangerously. Life will find a way.”

Assuming that society is unwilling to give up non-essential activities such as air travel, concerts, conventions and cruises,  It will find a way to manage the risks associated with them.  Any risk not transferred through insurance is already self-insured by default, so the motivations for businesses to figure this out are quite high. Non-essential businesses will have to find a way to spread this contingent liability from their balance sheets in order to develop long-term business plans, secure financing and simply exist.

There are three ways for them to spread risk to achieve these goals:

  • Across policyholders: this is admittedly very hard to do with a pandemic as all policyholders in the insurance pool have a risk of suffering a loss at the same time.
  • Across time: if we knew for sure that pandemics were 100-year events, then we could simply spread the risk over the next 100 years to ensure that there is adequate funding for the next event. While we don’t know the frequency for future events like COVID-19, it is hard not to reflect on where we would be today had the 65th US Congress and President Woodrow Wilson taken action to create such a backstop in 1918.
  • Across exposures: anyone who has ever sold, underwritten or purchased a package liability policy knows how this works. You work to calculate a specific premium for the auto, commercial general liability and workers’ comp risks, until you realise it’s just easier to underwrite and price for the entire package of risks.

Insureds and risk managers are in the same boat as insurers with regard to their ability to easily spread pandemic risk to other policyholders or across time. However, they have unlimited access to their own easily insurable exposures, and the opportunity to sell other insurance products to their customers, suppliers and stakeholders.

If I were the risk manager for a large food company or any original equipment manufacturer I would be looking to sell product liability and recall insurance to all my suppliers. I am going to be involved in any litigation for these risks anyway, so I might as well collect premiums across my supply chain to cover that exposure.

The very act of underwriting the supply chain will improve my visibility to quality control, reputational, counterparty and all manner of other risks. I don’t have to pay for advertising, agent commissions, expensive office space or operating 300 legacy IT systems. With the help of insurtech, I can take all of the other easily insurable exposures away from the insurance industry and use them for my own means.

Risk managers don’t need to make money selling insurance to all your former clients and insureds. They simply need those easily insurable third party risks to create a pooling mechanism to sell their own companies the pandemic insurance they need. Around 80 percent of the value of the S&P 500 is currently intangible assets, so perhaps they’ll sell themselves some IP, cyber and flood insurance as well.

Whatever insurance the insurance industry cannot sell a firm, a firm can simply sell itself. They just need to take away all of your other easily insurable risks to do it. Firms that are too small to do this themselves can look to trade associations, co-ops, group captives and other risk retention groups (RRGs). That will enable them to reach the scale needed to reimagine the insurance industry so it works for the one risk we have all learned that we really need.

A sincere and caring warning to friends in the insurance industry

Wars cannot be won on two fronts. The barrier for new hybrid insurers such as Google, Amazon, Uber and Tesla, or trade associations and co-ops, is much lower than the insurance industry realises.

Commercial insurers face the fight of their lives against (group) captives, insurtech, risktech, RRGs and insurance-linked securities. This group offers new forms of insurance and alternative risk financing, at a time when commercial insurers are already fighting most state legislatures and courts regarding the insurability of pandemics. Not finding a way to participate in the pooling of pandemic risk creates the very circumstances needed to ignite a new digital insurance industry.

The proposed federal programme, called the Business Continuity Protection Program (BCPP), would allow businesses to purchase revenue replacement coverage for up to 80 percent of payroll and other expenses. That is a fine idea that works pretty well in lieu of insurance.

Remember the concerns about meat shortages at the start of the crisis?  The insurance industry’s recommending the BCPP feels as though the American Cattle Association put forth a plan to solve meat shortages with Beyond Meat and the Impossible Burger. That plan would certainly solve the crisis, but is it really what you or consumers want? Consumers want both meat and traditional insurance during a pandemic.

The insurance industry’s abdication of its role as the master of spreading risk reminds me of another quote, this one from Doc Brown, in another favourite movie I streamed during the pandemic, Back to the Future III: “You’re not thinking fourth-dimensionally!”

When the insurance industry says pandemics are uninsurable to avoid post-COVID-19 losses, it looks to me as though insurers have removed themselves from the timeline with regard to the future of insurance.

Zach Finn is clinical professor and director of the Davey Risk Management and Insurance Programme at Butler University. He can be contacted at: