The next pandemic: Are insurers prepared?

Still, some insurers, including Lexington Insurance, Gallagher and Hiscox, have launched various policies to act as either stand-alone products or wrap around existing coverage in an attempt to provide some risk transfer with Ebola.

In general, however, little coverage exists for pandemic situations. Richard Kosinski, president of Specialty Insurance Advisors in Boston, an exclusive U.S. distributor for Lloyds of London, says it's because pandemics are typically short-lived and can't be underwritten with any amount of certainty. He understands the reaction by insurers. "Some new pandemic throws everything into chaos," said Kosinski. "They don't understand how to underwrite it or price it, and how to implement it. That's what you're seeing [with Ebola]. The first reaction is to exclude it." 

Sound reasoning

That, said Chung, is just good business strategy. He uses the example of influenza: "With influenza, there have been hundreds of millions of deaths within the last 100 years. Every 50 or 60 years, something bad comes along and a ton of people die. If you see the impact of that kind of real global pandemic on the global economies and the impact on insurance, the losses to insurers now if something like that were to happen, that's going to create a hole into which will drain all of the reserves of the insurance companies. It would cost hundreds of billions of dollars," Chung predicts.

Norris points out that even with coverage, some of the triggers are so specific that coverage may never apply. One policy states that coverage is triggered when 'an order of an authorized governmental agency prohibits access to an insured location as a result of the enforcement of any law or ordinance regulating the actual — not suspected — presence of communicable disease.' Norris says "A civil authority is not going to come and shut down a hospital because of a communicable disease. That's why hospitals exist. On an environmental policy, do you have to wait to clean up the offending material until somebody shuts you down so your insurance policy will trigger?"

Creating an overall model may not be possible, in Chung's estimation, due to the varying nature of each pandemic event. Blanket exclusions for something like influenza won't work, he says, because insurers going to market with a product that won't cover it will create market turmoil and allow competitors to capitalize on the need.

That's exactly what has happened in the market concerning Ebola, say the experts. Since Ebola is not a long-term disease nor considered a pandemic, Kosinski says insurers offering the coverage may be able to do so cost-effectively. Current exclusions to coverage include coverage for people traveling to areas experiencing a high numbers of cases.

Best practices for pandemics

Instead, Norris says insurers should be looking at modeling diseases with pandemic potential to see how it might truly impact them "…to the extent there are possibilities for them to act as change agents – for example, working with insureds to make sure they have a policy where folks stay home if they are indeed ill – that's a simple change."

Kosinski advises insurers to examine infection rates, transmissibility and how many people are currently infected. His company offers Ebola coverage underwritten by Lloyds. The policy, originally a needle stick indemnity product coverage for hepatitis B and C and HIV, now includes Ebola exposure for an additional cost. He says that insurers considering coverage need to look at how big the pool of insureds is, what risk factors exist, and what the expected claims rate might be.

In the end, it's a question of price. "If you look at the pool of insureds and it's that small, you can construct anything to cover anything," Kosinski said. "The question becomes, how can you cost justify it?"

Norris says a pandemic product is harder to underwrite because it affects everybody at the same time. "That's conflagration risk, and it's difficult to get your arms around," she adds. "With pandemic, there's pretty much nothing you can buy, that we've found, that is responsive."

Of Ebola, Norris says "This is a perfect event, if you ask me. This shows that hey, maybe there's just a lot of fear here and there's not a lot of real exposure. This is something that's underwritable."