At first glance, this seems eminently reasonable. American small businesses are hemorrhaging cash, and the federal government’s small-business assistance is both disorganized and tardy. If someone doesn’t act soon, then when it is finally safe for businesses to reopen, there won’t be enough businesses left to do so. And who better to stick with the bill than the insurers to which those businesses have faithfully paid premiums for years?
Besides, if the government orders your bar or restaurant to close during a nationwide epidemic, why shouldn’t that be covered by your business-interruption policy? I mean, it’s right there in the name.
Unfortunately, while business-interruption insurance sounds like something that ought to cover a nationwide quarantine, most policies pay out only if business is interrupted by physical damage to the premises. And while it might seem somehow practical — and just — to stick insurers with the bill, that doesn’t solve the problem. New liability for business losses can be created by law, but the assets needed to cover those losses cannot be conjured by fiat. Courts discovered this the hard way in the 1990s, when broadened liability for asbestos claims pushed first companies, then peripheral businesses and finally their insurers into insolvency.
Yet asbestos claims were small and manageable compared with the current crisis. Fundamentally, insurance works by pooling risk. In a large enough group of people or businesses, a small and relatively predictable number will experience deaths, fires, automobile accidents, robberies and so forth every year. So we can each pay a modest premium, the insurer can invest that money, and then it pays the predicted number of claims out of the investment returns.
The mathematics of this start to break down in a global crisis, when, as wonks noted in 2008, “all correlations go to one.” In a financial crisis, stock prices that used to move independently all head in the same direction: down. In a war, the risks of people being killed, businesses failing and buildings being destroyed zoom simultaneously upward across regions or continents.
And in a pandemic, everyone’s business closes at the same time, which would hand hypothetical business-loss insurers a bill for a substantial fraction of national income. Moreover, this risk is also correlated with a substantial risk that financial markets will crater, taking insurer assets with them. Even if insurers had written the sort of business-interruption policies that some legislators now want them to provide, it seems more likely that insurers would be going bankrupt than that they would be able to single-handedly rescue so many of the nation’s businesses.
“Half the global economy just shut down overnight,” says Ray Lehmann, director of finance, insurance and trade for R Street, a Washington-based think tank. “The insurance industry obviously doesn’t have the capital to support half the economy.” He estimates that all commercial property insurance written for North America is backed by perhaps $600 billion in assets. That sum, though significant, is dwarfed by the staggering cost of the ongoing shutdowns.
The size of the problems means such insurance would be a hard sell, even to customers. If there is a high risk of a global crisis, the price of insurance against it will be close to the cost of expected claims. And if it’s low-risk, people think, why bother buying insurance for something that hasn’t happened in decades? Lehmann notes that one U.S. insurance broker, Marsh, was offering pandemic policies before the coronavirus crisis hit; no policies were sold.
Only one entity can provide insurance against these sorts of events: a stable national government that can cover today’s losses by borrowing against tomorrow’s income. Moreover, that’s exactly who should be paying the costs of a pandemic.
After all, while the businesses that are currently shuttered didn’t do anything wrong, neither did their insurers. The government has shut them down to protect us all against a deadly virus. Since everyone is getting the benefit, everyone should pay for it: through borrowing now and taxes later.
Think of it as Americans belonging to one of the largest mutual insurers in the world: the United States of America, Ltd. It’s a scandal that small businesses are having some trouble getting their claims addressed. But it would still be a mistake for them to try recover losses from lesser firms. Instead, we should all focus on making sure that our mega-insurer covers all valid claims in the most efficient and timely manner.