How to Reconcile Pandemic Business Interruption Risk With Insurance Coverage

Abstract

In the face of major risks, the financial capacities of private (re)insurers are rapidly reached. For major risks such as natural catastrophes, a risk transfer can be operated to the financial markets through securitization. A pandemic is a cat. Unfortunately a nat cat securitization strategy cannot be replicated for a pandemic cat. In this paper, we consider the economic losses that firms are bearing during a pandemic like the COVID-19. We focus on their most important issues: Risk correlation, impact of administrative decisions, moral hazard, and financial liquidity. Then we propose a coverage strategy of the pandemic business interruption risk that combines self-insurance, standard – capped – (re)insurance and new double triggered pandemic business interruption bonds. Lastly, we provide a simple illustration with French data related to the losses borne by the catering sector. © 2023 Editions Dalloz Sirey. All rights reserved.