Building financial resilience for pandemics

A barrage of hurricanes battered the U.S. this year, resulting in hundreds of lives lost and tens of billions of dollars in damage. Thankfully, hurricane season ends today, but even as one disaster season draws to a close, another even more deadly threat persists. With already over 265,000 deaths and an economic impact of many trillions of dollars, coronavirus infection rates are on the rise again and the disease is as contagious as ever. While a vaccine for this particular virus is on the horizon, we must take actions now to protect ourselves from the staggering economic consequences of future pandemics.

120 years ago, a hurricane battered Galveston, Texas, and became America’s deadliest natural disaster. While delayed warnings and inadequate seawalls resulted in a tragic human toll, the financial uncertainties sunk the city’s bright future.

Unlike in 1900, we can protect ourselves from the economic consequences of disasters. By providing financial protection and changing behavior, insurance today helps safeguard our economy and our society from “traditional” disasters. And in the future the same could be true for pandemics, if we act now.

Until earlier this year, I was the FEMA official responsible for building resilience for disasters. In that role, I saw firsthand how individuals, businesses and communities with insurance recovered more quickly and more fully than those without. For example, FEMA’s average payment to uninsured disaster survivors from Hurricane Harvey in 2017 was approximately $3,000. This stands in stark contrast with the average payment of $117,000 for those with flood insurance.

As we saw with the Galveston example, disasters were once a risk that the private market could not address. Today the economic consequences of disasters are a force that can be largely managed by the private market. So, too, should we be able to manage the financial impact of pandemics if we combine the power and credit of the U.S. government with the insurance industry’s tradition of mitigating risks through economic incentives for policyholders.

To date, a robust pandemic insurance market has failed to develop. Despite news coverage of previous epidemics like SARS, H1N1 and Ebola, these threats had until recently seemed unlikely and as such the costs were deemed prohibitive by most businesses. Hence, demand for pandemic risk insurance remained limited. Meanwhile insurers have been hesitant to underwrite this risk because the payouts, while infrequent, could be massive. Continuing the status quo leaves businesses and society vulnerable to the financial consequences of pandemics.

Insurance is integral to the healthy capital markets that make economic growth possible. When times are good, insurance gives American businesses the confidence they need to invest, build, and grow. When a crisis occurs, insurance is there to minimize disruptions and help prevent insolvencies. But the utility of insurance extends beyond these obvious benefits.

Insurance can change behavior. When insurers write policies for properties in areas prone to disasters, premiums reflect these risks. Insurers encourage their policyholders to invest in mitigation measures to reduce their risks, and their premiums. As I saw during my time at FEMA, from storm shutters to seawalls, mitigation saves homes, businesses, communities, economies and most importantly, lives.

If pandemic insurance were to be widely offered, insurers would provide policyholders with long-term incentives to continuously reduce their risks from contagious diseases by diversifying their supply chains, continuously updating their business continuity plans, and leveraging pandemic models and planning tools to anticipate and address disruptions. These incentives could also spur broader information sharing, development of better metrics to manage the risk, and other innovations that could blunt the impacts of future pandemics.

And just as with traditional insurance policies, not only can mitigation measures reduce premiums for policyholders, but they also change their behavior in a way that provides broader social benefit. By making businesses more resilient, insurance secures consumers continued access to goods and services and helps keeps businesses’ workers healthy and employed. These benefits will accrue not simply to the business owner, but to communities and the broader economy. Given these widespread benefits, we need to work together to find the right solution.

Protection against pandemics should not fall squarely on the shoulders of either insurers or governments alone. The solution should be one that leverages the insurance industry’s private sector incentives and the federal government’s access to capital when losses are overwhelming. By policyholders and insurers assuming some of the risk and the government bearing the rest, we can collectively protect the nation’s economy against future pandemics.

While we are unlikely to eradicate pandemics, we can manage the risks by taking action now. The result will be a more resilient America next time crisis strikes.

Daniel Kaniewski was Deputy Administrator for Resilience at the Federal Emergency Management Agency from September 2017 to January 2020. He is now a managing director at Marsh & McLennan Companies. Marsh, Marsh & McLennan’s insurance brokerage unit, helps companies find appropriate policies. As such, we could benefit financially from the advice offered here.

A version of this article originally appeared in The Insurer.