A pandemic business interruption insurance

Alexis Louaas and Pierre Picard
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Alexis Louaas: CREST-Ecole Polytechnique, Palaiseau Cedex, France, and Square Research Center

The Geneva Risk and Insurance Review, 2023, vol. 48, issue 1, No 1, 30 pages

Abstract: Abstract We analyze how pandemic business interruption coverage can be put in place by building on capitalization mechanisms and a portfolio management strategy. As evidenced with COVID-19, pandemics affect economic sectors in differentiated ways: some are very severely affected because their activity is heavily impacted by travel bans and constraints on work organization, while others are more resistant. This opens the door to risk-coverage mechanisms based on a portfolio of financial securities, including long-short positions and options in stock markets. We show that such a strategy allows insurers to offer business interruption coverage in pandemic states, while simultaneously hedging the risks associated with alternating bullish and bearish non-pandemic states. These conclusions contrast sharply with the idea of governments being the only solution to the pandemic insurability problem. They are derived from a theoretical model of corporate risk management, and their practical relevance is illustrated by numerical simulations, using data from the French stock exchange.

Keywords: Pandemic; Business interruption; Insurance; Corporate risk management (search for similar items in EconPapers)
JEL-codes: G11 G22 G32 (search for similar items in EconPapers)
Date: 2023
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Working Paper: A Pandemic Business Interruption Insurance (2020)
Working Paper: A pandemic business interruption insurance (2020)
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DOI: 10.1057/s10713-023-00080-7

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