How to Reconcile Pandemic Business Interruption Risk With Insurance Coverage

Sandrine Spaeter

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: In the face of major risks, the financial capacities of private insurers are rapidly reached. Reinsurance is used to ensure an acceptable (and also imposed by regulation) solvency ratio. Yet standard reinsurance can also be unable to provide an adequate level of compensation. For major risks such as natural catastrophes, a risk transfer can be operated to the financial markets through securitization. The today well-known cat bonds, cat options, or swaps permit the issuer (a state prone to earthquakes, an insurer exposed to different major risks) to win on the financial market while loosing on the physical one following a cat. A pandemic is a cat. Unfortunately a nat cat risk management strategy based on securitization cannot be identically replicated for a pandemic cat. In this paper, we discuss the main differences between nat cats (also technological disasters) and pandemic catastrophes in terms of the economic losses. Risk correlation, basis risk, moral hazard, failure of world mutualization are mainly at stake. Then we propose a coverage strategy of the pandemic business interruption risk that combines self-insurance, insurance contracts, double triggered pandemic bonds and contingent public debt, each tool being mobilized with regard to their opportunity, transaction and management costs. We also discuss the outline of an adequate hybrid risk management governance by answering the question ’Who shall issue what?’.

Keywords: pandemic risk; operational losses; (re)insurance; securitization; corporate risk management. (search for similar items in EconPapers)
JEL-codes: G11 G22 Q54 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2021-18

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