Many Businesses Thought They Were Insured for a Pandemic. They Weren’t. (Ep. 437)

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A fine reading of most policies for “business interruption” reveals that viral outbreaks aren’t covered. Some legislators are demanding that insurance firms pay up anyway. Is it time to rethink insurance entirely?

Listen and subscribe to our podcast at Apple PodcastsStitcher, or elsewhere. Below is a transcript of the episode, edited for readability. For more information on the people and ideas in the episode, see the links at the bottom of this post.

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Here’s a riddle: name something that one of every three small businesses in the U.S. bought to protect themselves in an emergency — but when an emergency happened, it turned out to be useless. Are we talking about a burglar alarm? A sprinkler system? A gun? No, none of those. This riddle is best solved by asking an actual small-business owner.

Janice JUCKER: Janice Jucker, and I’m co-owner of Three Brothers Bakery with my husband, Bobby.

Three Brothers Bakery is in Houston; it has a few shops there and also sells online. They are particularly famous for their pecan pies. And famous for something else:

JUCKER: Our honorary titles are King and Queen of Disasters, because we’ve been through four floods, a fire, a hurricane, and now a pandemic.

The first flood was in 2001, after Tropical Storm Allison:

JUCKER: It took about three days to clean up. 

Before Allison, Jucker had suggested to her husband that they ought to buy flood insurance.

JUCKER: But of course, he didn’t listen to me. 

This left the Juckers on the hook for about $100,000 of damages. But it did inspire them to buy flood insurance, which would cover property damage — as well as what’s called business-interruption insurance, which would cover lost revenues in the case of a disaster. These turned out to be prudent purchases, because, in 2008:

JUCKER: In 2008, we had Hurricane Ike, and we think a tornado came down the street, ripped off the roof, and we were closed for nine months for that one. And that was about $1.2 million. 

That’s $1.2 million, of damages. Which their insurance for the most part covered. And then in 2015:

JUCKER: In 2015, the Memorial Day flood, which we got about three-and-a-half feet of water, and that was a million-dollar event. 

And another successful insurance claim.

JUCKER: 2016, we had the Tax Day flood, but we were getting ready to close five days later to do the repairs from 2015, so we just pushed the water out and didn’t make a claim or anything. 

But Three Brothers Bakery wasn’t done being flooded. In 2017 came Hurricane Harvey:

JUCKER: It was basically a river on our street. And that was another million-dollar event. And then I think it was 2018, we had a fire in December.

So much calamity. So much property damage! But fortunately, the Juckers had continued to carry insurance.

JUCKER: If we had not had insurance, we would have been out of business.

So, Janice Jucker has come to appreciate the insurance industry — but she also understands the insurance companies are not fully on her side.

JUCKER: I mean, I think that insurance companies — and understandably — their goal is not to pay you. Getting paid is a negotiation. So, one time I got my check for business interruption with Hurricane Ike. And I noticed it was short, and so I called. I said, “Why is this 20 percent short?” And the adjuster says to me, “Well, we’re in a recession,” because it was 2008. So, I said, “That’s ridiculous.” So, I made a PowerPoint and I gave it to the insurance adjuster.  

And the company did increase the Juckers’ payout.

JUCKER: I felt pretty good about that. 

Even with all her experience dealing with disasters, the Covid-19 pandemic has been its own category.

JUCKER: A hurricane, a flood — you know, it happened and it’s over. And then you clean up and you move on. The difference with Covid is, it’s not over. 

Back in the spring, as the economy in Texas began to shut down, Three Brothers was allowed to stay open, since a bakery is considered an essential service. But essential doesn’t mean successful.

JUCKER: We saw an immediate drop in revenue. Dramatic. 

Dramatic and, again, lengthy. At least Jucker has business-interruption insurance. In fact, one in three small businesses in the U.S. have it. But guess what business-interruption insurance doesn’t cover?

JUCKER: Our insurance covers no losses from Covid. I did, of course, pull out my book, but it just doesn’t — it didn’t cover it because the kicker is, you have to have some kind of physical damage. 

That’s the same situation most small businesses now find themselves in, even if they did go to the trouble and expense of buying business-interruption insurance. No physical damage, no insurance reimbursement. Why should you care? Small businesses employ nearly half of American workers. Even before the pandemic, many small businesses only had a few weeks’ worth of cash on hand, if that. Many small businesses have already gone under, with more to follow. How will the insurance industry — and the government — respond to this crisis? And why wasn’t this pandemic insured? That’s what we’ll try to find out today on Freakonomics Radio.

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Stephen DUBNER: So, correct me if I’m wrong, but I really can’t think of a product that more people buy even though they don’t want to buy than insurance, yes?

Bruce CARNEGIE-BROWN: Well, that might be right. One of the challenges is that people don’t buy enough insurance because they slightly resent the need for insurance. 

And that is:

CARNEGIE-BROWN: Bruce Carnegie-Brown, chairman of Lloyd’s of London. 

Even if you know nothing about insurance, you probably know Lloyd’s of London. They were founded in 1688.

CARNEGIE-BROWN: And indeed, it was really the first commercial insurer in the world. The oldest class of business in the commercial world is marine insurance — so, the transportation of cargoes and the underwriting of ships.

In more recent centuries, Lloyd’s became famous for insuring one-of-a-kind properties.

CARNEGIE-BROWN: We insured Betty Grable’s legs. We insured David Beckham — the footballer’s — legs. And Rudolf Nureyev’s — the ballet dancer’s — legs. We also have at some point insured Dolly Parton, but I don’t think it was her legs.

But Lloyd’s is not just an insurance company.

CARNEGIE-BROWN: Lloyd’s is a marketplace that is a host, as in any marketplace, to a number of market participants. And we host 85 underwriting syndicates at Lloyd’s.

So, Lloyd’s matches those who wish to buy insurance with those who wish to sell it. Some of the sellers lay off the risk they insure onto what are known as reinsurers — that is, insurance companies who insure the insurers.

CARNEGIE-BROWN: Well, we are also, ourselves, a reinsurer of other people’s risks. So, some of this can be a little bit circular.

“Circular” would be one way of putting it. For many on the outside, “baffling” might be a better term. But let’s start with some basics. There are many, many, many forms of insurance: health insurance and life insurance, of course, along with insurance against all sorts of unforeseen or undesirable outcomes. This often falls under what is known as property-and-casualty insurance.

CARNEGIE-BROWN: We do a lot of big natural-catastrophe insurance at Lloyd’s. And one of our biggest lines of business is hurricanes and windstorms in North America.  

DUBNER: Are you involved in insurance against wildfires at all?  

CARNEGIE-BROWN: Yes, I’m afraid we are. So, in places like California, these are very high-density places and places of very high economic value. And therefore, the claims that arise from these kinds of wildfires are commensurately high. 

DUBNER: So, how is it most possible for Lloyd’s to lose a lot of money in a given year?

CARNEGIE-BROWN: So, the issue would be that we underwrite in reasonably large size, very severe, theoretically infrequent events. And so, if those events come together, it can create real challenges for us. So, the most obvious examples in recent times would be, in 2005, three hurricanes went through the United States. And I reference the United States a lot because 45 percent of all of our business comes from the U.S. And in 2017, there were also three hurricanes that went through the southeast of the United States, in Louisiana and Texas, and those created very sizable claims on the marketplace. And as a result, the market made a loss. 

Lloyd’s lost money in 2017 and 2018, but returned to profitability in 2019. That was a good year for most property and casualty insurers in the U.S., with the sector earning a profit of more than $60 billion. But then, of course, came 2020, and a global pandemic. What has that done to Lloyd’s’ business?

CARNEGIE-BROWN: We think upward of 16 lines of insurance business are affected by the pandemic. The easiest ones to understand are things like event cancelation. We have a very big business in providing insurance to things like the Wimbledon tennis tournament or the Tokyo Olympics. And when these things get canceled or postponed, there are very quantifiable claims that are reasonably easy to calculate and to pay out on. We also have issues like trade credit, when supply chains are damaged, travel insurance as well.

But then, what develops over time are other kinds of claims. So, there will be claims associated with medical malpractice because people will believe patients haven’t been treated appropriately for the pandemic, for instance. And then, it feeds through into things like the directors’ and officers’ insurance, which is the insurance that companies buy to protect their officers in the performance of their business. The challenge with Covid is dimensionally more complex as a risk for the insurance industry to manage than your average hurricane.

Back in May, just a few months into the pandemic, Lloyd’s estimated that Covid losses across the property-and-casualty insurance industry would be an unprecedented $200 billion.

CARNEGIE-BROWN: Of which about half were because the assets that we hold to pay the claims were impaired by the crash in the stock market. 

Okay, we need to back up a bit here.

DUBNER: There’s one thing I’d like to explain to listeners, which is how many or most insurance companies make money, which is not just by taking in hopefully more money than they pay out in claims, but by investing. It is an investing business. Can you just talk about that for a moment? 

CARNEGIE-BROWN: Well, it is an investing business because we take premiums in the form of cash. And those premiums are then invested until claims arise. 

In other words, insurance companies take your money, in the form of what they call “premiums” — a clever idea, calling your bill a “premium,” as if it’s a wonderful thing. They then invest that money in, say, the stock markets. You may recall that as the pandemic began to spread earlier this year, most stock markets cratered. Which made sense. But many markets, including the U.S. markets, have recovered — which seems to make less sense, considering that the pandemic persists. I asked Carnegie-Brown if he could explain that.

CARNEGIE-BROWN: Well I can’t. I mean, if you strip out the technology firms, actually, the markets haven’t recovered very well. There’s been a huge concentration in the technology markets. And of course, that’s not unsurprising because I do think that the pandemic has been an accelerator of the use of technology in many traditional business lines. 

Okay, so going back to that May estimate of a $200 billion industry loss: half of that loss, Carnegie-Brown says, was expected from declines in insurers’ investment holdings. Declines which, as we just noted, were promptly recovered.

CARNEGIE-BROWN: And the other half were directly related to claims. Now, on the actual claim side of the equation, that $100 billion ranks up there with the kind of hurricane events I talked about before as a very major loss for the overall insurance industry.

Now, you may think that no one outside the insurance industry or their shareholders should bemoan this loss. Bruce Carnegie-Brown, not surprisingly, has a different view of the industry. A more appreciative view of insurance.

CARNEGIE-BROWN: If you sit looking at it from my perspective, it’s actually a great enabler. 

An enabler how? Consider the act of driving your car.

CARNEGIE-BROWN: When you look at the most frequently bought form of insurance, it’s motor-car insurance, and you have to have it in order to drive a car.

Auto insurance is one of the few forms of insurance that is mandatory in most places. What would it look like to drive a car without insurance?

CARNEGIE-BROWN: If you looked at driving a car through a different lens, you’d say that you couldn’t afford to get into your motor car, because if you happened to knock somebody over or have an accident that created a disability in a third party, the cost to you in economic terms — let alone all of the emotional issues — would be beyond your net worth. And so, actually, it enables things to happen. 

“It” being insurance.

CARNEGIE-BROWN: And we like to think of it, therefore, as enabling people to take more risks than they would otherwise be able to take. And actually, Lloyd’s has a proud history of doing firsts in this area. So, we did provide the the first automobile insurance policies, the first insurance policies for airlines, the first insurance policies for satellites, and, most recently, the first insurance for cyber-risk.

Okay, so a natural question to follow: how about pandemic insurance? This is where it gets, as Bruce Carnegie-Brown might say, a bit circular.

CARNEGIE-BROWN: Yes. But essentially, the insurance of business interruption — which is the interruption of your revenues because of an event — was essentially a property-insurance policy. 

Remember, companies like Three Brothers Bakery in Houston have what is called business-interruption insurance.

CARNEGIE-BROWN: Let’s say you run a shop and your shop is flooded. And as a result of the flood, you can’t open, you lose revenues. And the insurance was designed to cover that. 

And indeed, the Jucker family in Houston did have storm damage covered in the past — repeatedly.

CARNEGIE-BROWN: And then, customers were able to buy extensions or additions to the policy which covered them for additional risks. And one of those, certainly in the case of Lloyd’s, was for pandemic or notifiable diseases risks.  

DUBNER: When did you start writing that addition? 

CARNEGIE-BROWN: Oh, we’ve been doing that for a long time. So, there’s quite a good report on the Lloyd’s website after the SARS issue where we identify pandemic as a growing risk around the world. And we’ve been writing insurances for pandemic risks since that time. But most people don’t buy it. And as a result, do not have the cover.

Most of this is really about having your own personal risk register. And companies do the same thing. And one of the challenges for pandemic is that it fell too far down the list. So, people were aware that pandemics could happen. But they didn’t believe it could happen to them. And so, you would rightly imagine that pandemic will creep up the list. But people can’t afford to be insured for everything.

Back in July, the C.E.O. of Lloyd’s estimated that between 80 and 90 percent of businesses with insurance wouldn’t be covered for pandemic-related shutdowns, which were mandated by the government. Because what “business-interruption” coverage typically is linked to, says Carnegie-Brown:

CARNEGIE-BROWN: It was very much linked to physical damage in the property. But its label, as you suggest, is much more all-encompassing than that, which is why I think a lot of confusion has arisen. And I think in the industry, we need to think a little bit about how we label some of these products because they’re not as inclusive as they should be. 

Janice Jucker of Three Brothers Bakery would agree. When you buy a business-interruption policy, she says:

JUCKER: You get a book. It’s about three inches thick. And I do recommend that you make them print it and give it to you. And the other thing I would recommend, is to read the policy before. It is better than sleeping pills, I promise you. And read it with a highlighter. And you’ll find some things are missing.  

CARNEGIE-BROWN: And so, where you end up in dispute is with the precise wordings of the policy. You get into arguments of things like, was it the pandemic that caused the losses or was it government action through lockdown? Were your premises directly affected by this, or was the disease somewhere else, and you’re just caught as a third party? But the underlying tenor of your question is — which I absolutely support — is that the worst kind of outcomes here are where customers think they have protection and they don’t. 

Some of these disputes inevitably go to court. Carnegie-Brown says that U.S. courts have thus far been more likely to side with the insurance companies, as opposed to courts in the U.K., which are more inclined to rule in favor of the small businesses.

CARNEGIE-BROWN: One of the reasons why the insurance companies are doing rather better in the United States is because the policy wordings are much tighter in the United States. 

And why are the policy wordings much tighter in the U.S.?

CARNEGIE-BROWN: Insurance is run state-by-state in the U.S. And one of the things that most states do is require insurance companies to file any change in the wordings of their policies alongside changes in price. So, there’s a regulatory procedure to the wording. We don’t have that in most of the countries in Europe. And as a result, wordings are much looser because you don’t want to go to your U.S. regulator with something that’s marginal. So, you only change the wording if it’s reasonably material. And as a result, in the United States, there’s been more discipline in the underwriting of contracts. 

And more discipline in the underwriting of insurance contracts has meant that many business owners who thought their business-interruption insurance would cover their pandemic losses were a) wrong; and b) left with no legal recourse. So, is that the end of the story? No. It is not the end of the story:

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As we’ve been hearing, a lot of businesses in the U.S. had insurance policies they thought would pay out when they were slammed by the pandemic. But they didn’t pay out. The typical business-interruption insurance policy specifically excluded losses from a pandemic.

Robert CARROLL: I believe the regulators on the state level were asleep at the switch.  

Robert Carroll is a member of the New York State Assembly.

CARROLL: They didn’t understand what this exclusion clause would mean. They looked at it and they looked at the plain language of it, which is how folks interpret contracts. And they said, “Oh, if your business gets the flu, this insurance won’t cover it.” What they didn’t assume would be that there would be a worldwide pandemic that would shut down the global economy.

But Carroll doesn’t blame just the regulators.

CARROLL: Insurance companies surreptitiously slipped in a vague clause — and they didn’t slip this clause into every contract. But about 80 percent, it seems like. Where they excluded viruses, bacteria, or microbes. And these clauses were approved by state regulators.  

You could, of course, argue that “slipping a vague clause” into a contract is what lawyers who write contracts are paid to do. And that it’s the job of the people who sign the contracts to understand. Carroll doesn’t see it that way.

CARROLL: When you have an actor like a small business purchasing insurance from a multinational corporation that has teams of lawyers and actuaries and provides this insurance as take-it-or-leave-it, there’s no negotiating of terms. And that’s the reason why legislatures and in this instance, the state legislature, which regulates insurance contracts, has the ability to go in. 

That is, to go in and do something about it after the fact. Carroll has introduced a bill in the New York State Legislature that would force insurance companies to reimburse businesses for pandemic-related losses even if their policies specifically excluded a viral pandemic.

CARROLL: This is about consumer protection. This is about small-business protection. 

Other states have similar measures in the works: California, Louisiana, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Rhode Island, and South Carolina. Carroll says this would hardly be the first time that governments have stepped in to override insurance contracts.

CARROLL: Southern states and Gulf states have passed legislation retroactively after devastating hurricanes and natural disasters to tell the insurance companies they’re not allowed to drop folks who have hurricane insurance, to require folks more time to put in claims after Katrina, etc. And these voided specific clauses in contracts. 

And American history, Carroll says, offers further guidance on undoing exploitive contracts.

CARROLL: We have tons and tons of examples where the state has come in and said we will no longer enforce restrictive covenants on the contract of sale of homes where they were discriminatory, where they said, you will not sell this home to a Black person or Jewish person or a person based on their their race or origin. And we said, no, that’s abhorrent and it’s against public policy. 

One argument against legislation like Robert Carroll has proposed is that it could bankrupt the insurance companies.

CARROLL: Bunk. They’re sitting on a trillion dollars. It’s not going to bankrupt the industry. 

Indeed, according to the U.S. Treasury, the property-and-casualty insurance industry in the U.S. had, as of 2018, total cash and investments of around $1.7 trillion, of which around $750 billion was considered “policyholder surplus,” growing at an average annual rate of 5 percent. So, let’s pretend, just for a minute, that states or even the federal government did decide to force insurance companies to bail out small businesses. How much money are we talking about here?

Howard KUNREUTHER: We are really talking about trillions of dollars of losses on business interruption. And I think the real issue is we don’t really know how long this is going to continue. 

That’s Howard Kunreuther. He’s an economist at Penn’s Wharton School of Business; he co-directs the Risk Management and Decision Processes Center there; and he has been studying the insurance industry for decades.

KUNREUTHER: Frankly, I shouldn’t be saying it. It is the most exciting time in my life because the first time that I’m here, people are really paying attention to this. 

DUBNER: So, let’s just get this out of the way. Do you and/or your center receive research or other funding from the insurance industry? 

KUNREUTHER: I appreciate your asking that. We have a sponsorship program where we do have insurers and reinsurers as well as other companies that provide us with an annual contribution. And there are no strings attached to this contribution at all. We pride ourselves, and have always prided ourselves, as being a neutral party. And our interest is not to in any way support any party, but to get the facts out on the table so we can say, “Here’s what we feel are appropriate ways to deal with the situation.”

The current situation, as Kunreuther sees it, is driven in large part by how most people think about insurance.

KUNREUTHER: The biggest mistake that I think we make on insurance — there are two. One is we underestimate the risk and we assume it’s not going to happen to me. “I don’t need insurance.” The second is a little more subtle, and that is we think of insurance as an investment. We don’t think of insurance as protection. People tend to buy insurance after a disaster, not before. They buy earthquake insurance after an earthquake. Even when they think the probability is lower that an earthquake will occur again than it was before. And then, here’s the kicker, they cancel their policy a few years later and say, “Look, I haven’t had a claim. Look at what I could have done with all my premiums.”

Kunreuther has explored these issues in a book called The Ostrich Paradox: Why We Underprepare for Disasters.

KUNREUTHER: What you have to tell people — and it’s very hard to do this — the best return on an insurance policy is no return at all. Celebrate you have not had a loss. 

The evidence that people do underprepare for disasters is quite clear. Here’s Bruce Carnegie-Brown from Lloyd’s of London:

CARNEGIE-BROWN: Every time a hurricane comes onshore in the United States, fewer than 25 percent of the people affected by the hurricane have insurance. 

At the same time, we do tend to buy other, less essential forms of insurance. 

CARNEGIE-BROWN: People insure their mobile phones, for instance. And that’s worth $500 or $600. But what they don’t do is buy enough health care if they get cancer or enough insurance for their families in the event that they die.

When it comes to buying the proper types and amount of insurance, Howard Kunreuther’s advice is — well, it’s sensible advice, perhaps, but it’s also frustrating for anyone who’s ever tried to read an insurance policy — anyone who’s not an insurance executive, or maybe a lawyer.

KUNREUTHER: People are not familiar with insurance at all. They often do not read their policies. They think that they have coverage that they actually don’t have. And as a result, I would say that most of the businesses, unless they actually had someone carefully looking at this, would not necessarily have realized that they were not covered for business interruption due to a pandemic. 

DUBNER: So, a lot of the media coverage early in the pandemic painted a picture that the insurance industry was toast. That between the stock market’s crumbling and many insurers presumably being responsible for a lot of payouts because of the pandemic. As it turns out, neither of those turned out to be accurate. So, it seems like the industry dodged a bullet, essentially. Is that accurate or am I overstating? 

KUNREUTHER: No, I think it’s accurate. I think by excluding pandemics, from coverage, they dodged the bullet. If it turns out that these states were successful in the courts by saying you have to pay retroactively, then this would cost the insurance industry huge amounts of money, billions of dollars. And this would be an enormous burden on the industry.

DUBNER: So, what happens if one state successfully legislates this? Does that become a domino that leads or forces other states to do the same?

KUNREUTHER: I would hope it would not. I would hope that each state would be independent in terms of how it would deal with this. And I would say that the insurers would make the case — and frankly, I would make the case, personally — that that would be inappropriate if it turns out that their coverage was excluded. Because we’re talking about an insurance policy and not a give-out or a subsidy that the insurance industry is responsible for. I think that most countries would say that this is a public-sector responsibility.

So far, that’s how the U.S. has seen it, as a public-sector responsibility. Through the CARES Act, the federal government directed more than a half-trillion dollars to small-business relief — to businesses with and without insurance.

CARNEGIE-BROWN: Governments all around the world have been pouring capital and cash into the economies to try to minimize the impact. 

That, again is Bruce Carnegie-Brown of Lloyd’s of London.

CARNEGIE-BROWN: And this is almost certainly helpful. That in itself has not changed whether the insurance industry is liable for its claims or not. But it raises the challenge of what to do about future pandemics. Because typically when insurers lose a lot of money on a line of business, they stop writing that line of business. What we would look at in this and what we represent to governments around the world is that they should think about this in the context of things like flood insurance or terrorism insurance, where often there’s a partnership between government and the industry. 

KUNREUTHER: The insurance industry did not charge a penny for terrorism coverage before 9/11. 

Howard Kunreuther again.

KUNREUTHER: It was surprising — they didn’t consider it as a separate aspect of insurance. They just didn’t really focus on it. 

In other words: insurers just included terrorism coverage in their business-interruption policies. It was not a separate carve-out. Probably because the risk just didn’t seem very large.

KUNREUTHER: They basically had not focused on what happened to the World Trade Center in 1993, the Oklahoma City bombings or terrorism around the world. But after 9/11, they all refused to offer coverage. They basically excluded it; it led to the Terrorism Risk Insurance Act, where the government got involved.

Carolyn MALONEY: After 9/11, New York — which I represent — could not get insurance for anything. 

That is U.S. Congresswoman Carolyn Maloney, who wrote the Terrorism Risk Insurance Act that Kunreuther mentioned.

MALONEY: Down at Ground Zero, you could not even insure a hot dog stand. The only way we could get insurance was partnering with one of our large companies, with Lloyd’s of London, and the premiums were through the roof. So, we offered a program — God forbid that we had another terrorism attack — that would be there to respond to it immediately with a government backstop.

Meaning the federal government would be the insurer of last resort in a devastating terrorist attack. This program is still ongoing; as of this year, it would be triggered after losses from a terrorism event exceed $200 million. This government backstopping allows insurance firms to offer terrorism insurance with premiums that are affordable. By now, you can surely see the parallels between terrorism and a pandemic from an insurance perspective. And that’s why Congresswoman Maloney has introduced a similar bill, called the Pandemic Risk Insurance Act.

MALONEY: According to most private insurance, they cannot provide business-disruption pandemic insurance support. So, this will allow a program to help businesses recover and react and rebuild after a pandemic.  

Here’s what she proposes:

MALONEY: First, once a pandemic is declared, each participating insurer pays out a deductible, which is equivalent to 5 percent of the value of premiums they collected in the previous year and the total amount of losses faced by insurers exceeds $250 million. Once the program is triggered and started, the federal government will be responsible for 95 percent of losses. And the insurers will be responsible for 5 percent of losses, up to a $750 billion cap.  

Maloney acknowledges there’s a lot of resistance in Congress to taking on such a potentially massive program.

MALONEY: But if we have a 9/11, if we have another pandemic, government is going to go in. We’re going to go in to help. So, we might as well set up a program that sets the parameters, the way it’s going to work, and is a partnership with the private sector who will be assuming part of the loss. 

CARROLL: It’s crazy. It’s crazy. It’s utterly crazy. So, in 100 years, when the next global pandemic happens, we’ll save those businesses?

That, again, is Robert Carroll, the New York state legislator. Just so you know, he and Maloney are both Democrats. His problem with Maloney’s proposal is that it’s not retroactive, that it doesn’t force insurers to pay out for this pandemic.

CARROLL: Carolyn Maloney had a similar bill after September 11th when insurance companies tried not to pay out claims. So, when was the next September 11th? It hasn’t happened. Insurance companies love this. It’s a great headline. People think, “Oh, they did something.” Meanwhile, everyone goes bankrupt except them. 

Bruce Carnegie-Brown of Lloyd’s of London has a different set of objections to Carolyn Maloney’s proposal.

CARNEGIE-BROWN: Rather than just create a kind of pandemic insurance product with government, our argument has been that that might be yesterday’s problem. What if tomorrow’s problem is a systemic cyber-attack? So, why don’t we create a product with government that is more flexible and can be used to address particular risks as they arrive? I think the key issue is resilience, actually. Resilience is a quality that is much undervalued by our economic models generally around the world. So, we’ve all been taught to grow as quickly as we can. We talk about lean inventories and just-in-time delivery and extended supply chains. And companies’ valuations have typically responded to that way of working. And I think we need to find ways to factor more value in to this issue of resilience.

So, interestingly, companies, when they report their business once a year, or even quarterly, make no mention of insurance, the protection that they have or do not have. And so, insurance is not yet embedded in companies’ thinking about the resilience of their balance sheets and their business models. And I think that’s a mistake. Now, I’m talking my own book in one sense there, for obvious reasons. But it does come back to this fact that I think the world is underinsured. And I think insurance can help build resilience against specific events when they happen. 

To that end, Lloyd’s has come up with three forward-looking insurance vehicles. The first idea is called ReStart.

CARNEGIE-BROWN: ReStart is very specifically about trying to provide what we call non-damage business-interruption insurance. 

In other words, the kind of business-interruption insurance that most firms who had business-interruption insurance thought would cover them for the pandemic, but which didn’t. Another idea is called RecoverRe, with the “Re” standing for “reinsurance.”

CARNEGIE-BROWN: RecoverRe is more of a banking product. Effectively, it argues that we’ll pay the claim up front and then recover it in premiums collected over subsequent periods of time. 

Sort of insurance-company-meets-mortgage-lender, if you will. And the third product is called Black Swan Re:  

CARNEGIE-BROWN: Black Swan Re is really trying to address the fact that some of these events are just too large. And so, they need government engagement. 

Carnegie-Brown, as chairman of an insurance firm, plainly is “talking his own book,” as he admits. But the economist and risk scholar Howard Kunreuther does see value in rethinking how insurance works, especially in rethinking the relationship between private firms and the public sector when it comes to future risks.

KUNREUTHER: The idea of expanding beyond pandemics is critical. And this is an opportunity for us to really reflect on what kind of risks the insurers can and cannot provide on a wide variety of different risks. Climate change is certainly one of them. And there is exponential growth with respect to CO2 emissions that will cause major, major damage on flood, trillions of dollars where there have only been billions in recent years. So, let’s take advantage of the pandemic to broaden our view of how we deal with catastrophic risk and then say what kind of a public-private partnership would we want to have for looking at all of them? 

Janice Jucker, co-proprietor of Three Brothers Bakery in Houston, is paying some attention to these bigger questions of insurance policy. But she’s more focused on the smaller issues. The issues she can actually control.

JUCKER: One thing about disasters, I tell everyone, you get one pity party and no more, because you’ve got to get to work.  

And Jucker, despite her intimate involvement with multiple disasters, remains an optimist.

JUCKER: I always say, out of everything bad comes something good. 

Including the history of her own small business.

JUCKER: So, the bakery history began about 200 years ago in Poland, and the family baked continuously, until the Nazis came and took the family — and frankly, the bakery — in 1941. And then my husband’s grandparents were murdered in Auschwitz. 

The survivors eventually made it to Houston.

JUCKER: And they didn’t speak English, but they knew the language of baking. And so, what were they going to do? So, they started a bakery. And my husband is now the fifth generation in the family that bakes Eastern European-style breads, pastries, etc. 

We asked Jucker if she is planning to sue her insurance company over their lack of coverage for the pandemic. 

JUCKER: Lawsuits are emotionally draining and you’re working backwards. And so, in the case of this, it’s probably gonna be a class-action. The lawyers are going to get a lot of money. I don’t know that it’s worth it for me. It might be worth it for a bar that’s completely closed and lost all their revenue. Then I would probably do it, because what else do you have to do? You’re completely closed. 

How about having state legislatures force payouts?

JUCKER: I would be shocked if they legislated that the insurance companies have to pay business interruption because frankly, I think they’d all go out of business. 

Would Jucker consider buying pandemic coverage now?

JUCKER: It would have to be better than when I heard about recently. I think it was $10,000, I got $100,000 in coverage. That’s just not worth it to me. 

So, what does Jucker think would actually be most helpful to small businesses like hers?

JUCKER: Vote on a stimulus package. That’s the most important thing, above all else. And you know, I’m not saying any political thing. I’m just saying that Americans are more concerned about what’s in their wallet right now. 

*      *      *

Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski. Our staff also includes Alison CraiglowGreg RippinMary DiduchCorinne WallaceDaphne Chen, and Matt Hickey. Our intern is Emma Tyrrell, we had help this week from James Foster. Our theme song is “Mr. Fortune,” by the Hitchhikers; the rest of the music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple PodcastsStitcher, or wherever you get your podcasts.

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