Insuring the 'Uninsurable': Catastrophe Bonds, Pandemics, and Risk Securitization
65 Pages Posted: 16 Oct 2020 Last revised: 22 Dec 2020
Date Written: October 15, 2020
In theory, governments could protect against the potential economic devastation of future pandemics by requiring businesses to insure against pandemic-related risks. In practice, though, insurers do not currently offer pandemic insurance. Even assuming companies could obtain sufficient statistical data to reliably set pandemic underwriting standards and rate tables, the insurance industry is concerned that it lacks sufficient capacity to cover those risks, which are likely to occur worldwide and be highly correlated. Pandemics therefore are in the class of risks, like nuclear accidents, war, and terrorism, that are sometimes defined as “uninsurable,” at least by private markets. This Article focuses on using risk securitization—a relatively recent and innovative private-sector alternative to government insurance, funded by the issuance of catastrophe (“CAT”) bonds—to insure pandemic-related risks. Risk securitization would utilize the “deep pockets” of the global capital markets, which have a far greater capacity than the global insurance markets, to absorb these risks. The Article also examines how risk securitization could supplement public-private catastrophe insurance schemes, such as Chubb’s recent pandemic-coverage plan, to reduce the government’s shared exposure.
JEL Classification: G22, K22
Suggested Citation: Suggested Citation