Insurance for economic losses caused by pandemics

Abstract

Private insurance coverage for economic losses caused by pandemics is limited. While many factors contribute to reduced demand and supply, we attribute the low amount of coverage to the high levels of capital that would be required to credibly insure pandemic economic losses with cross-sectional pooling mechanisms. Pooling over time significantly reduces the required capital and therefore the cost of insurance, but as a practical matter likely requires a government with the ability to borrow and tax. We also argue that insurance for economic losses due to pandemics likely generates positive externalities for the macroeconomy. We therefore analyze the general tradeoffs associated with different ways that a government can promote such insurance.