Insurability of Pandemic Risks

Abstract

The paper analyzes the scope for the private market for pandemic insurance and discusses the potential role of the financial market and the government. Building on a premise that pandemics are classified as catastrophic risks by the insurance industry, we start by providing a framework that explains theoretically how the catastrophe insurance supply and demand depend on the skewed and fat-tailed loss distributions and the co-movement between insurance stocks performance and the financial market. We use the model to estimate the supply of insurance for natural catastrophes. Then, by using the high-frequency data that tracks the economic impact of the COVID-19 pandemic in the US, we calibrate the loss distribution of a hypothetical insurance contract designed to alleviate the impact of the pandemic on small businesses and employment. The model of catastrophic insurance supply provides a calibration of the supply of pandemic insurance and allows us to compare it to other types of catastrophic insurance. Building on our estimation results, we discuss the scope for the risk transfer to the financial market and the role of the government.