A pandemic business interruption insurance

We analyze how pandemic business interruption coverage can be put in place by building on capitalization mechanisms and a portfolio management strategy. As evidenced with COVID-19, pandemics affect economic sectors in differentiated ways: some are very severely affected because their activity is heavily impacted by travel bans and constraints on work organization, while others are more resistant. This opens the door to risk-coverage mechanisms based on a portfolio of financial securities, including long-short positions and options in stock markets. We show that such a strategy allows insurers to offer business interruption coverage in pandemic states, while simultaneously hedging the risks associated with alternating bullish and bearish non-pandemic states. These conclusions contrast sharply with the idea of governments being the only solution to the pandemic insurability problem. They are derived from a theoretical model of corporate risk management, and their practical relevance is illustrated by numerical simulations, using data from the French stock exchange.

Automated summary

We analyze the implementation of pandemic business interruption coverage using capitalization mechanisms and portfolio management strategy. Different economic sectors are affected by pandemics in varying ways, and this allows for risk-coverage mechanisms based on financial securities. Our study shows that insurers can provide business interruption coverage during pandemics while hedging risks during non-pandemic states. This challenges the perception that only governments can address the issue of pandemic insurability and is supported by numerical simulations using French stock exchange data.