The recent coronavirus outbreak has stirred concerns worldwide as it evolved into a global crisis causing significant impact on economic activity, individual health, financial markets and social and political systems. Efforts to contain the pandemic has seen major decisions taken including closure of businesses following lockdown imposed by many governments around the world. This has consequently raised debates over whether insurance provides coverage for these losses. There is a general exclusion for losses resulting from pandemics which came to the limelight during the recent pandemic.

But why does the pandemic exclusion exist in the first place? Where do the principles of insurance fail when it comes to a pandemic? In order to address the question of insurability of pandemic risks, we first need to understand how conventional insurance works.

The insurance contract binds the insured and insurer whereby the insured transfers their risks of financial losses to the insurance company (insurer). Essentially, the insurer promises to pay losses to thousands of policy holders in the event of a loss. In return, the insurer receives premiums for the promise they offer. Insurers collect premiums from a large number of policy holders promising to pay for future losses such as car broken down, home damage among others. The premium collected is much less that the total value insured and reimbursed after a loss has occurred. Notably, what makes insurance viable is the fact that not everyone who is insured suffers loss at the same time. With only a few suffering losses in a given year, an insurance company is able to payout losses and make profit. Actuaries play an important role in helping insurance companies determine future expected claims and profits insurers expect to make.

Unfortunately, the same principles cannot apply to a pandemic. With a pandemic, as demonstrated by the recent COVID-19 virus, it can travel worldwide fast and impact a large part of the world at the same time. With everyone affected, this would mean everyone seeks compensation from the insurance company at the same time making the model largely unviable for an insurance company. In such a case, insurers will most likely become insolvent. More so, if insurers were to write a pandemic insurance the price will be too expensive, and most people will not buy.

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