How Underwriters Handle Pandemic-Related Risks

The global pandemic was not just a public health crisis; it was a seismic event that shattered long-held assumptions in the insurance industry. For underwriters, the traditional guardians of risk assessment, COVID-19 presented a challenge of unprecedented scale and complexity. Overnight, models built on decades of historical data were rendered obsolete by a novel, systemic, and interconnected threat. The question shifted from "What is the probability?" to "What is the next global disruption?" Today, as the world grapples with the aftermath and the looming possibility of future pandemics, the art and science of underwriting are undergoing a profound transformation. This is the story of how underwriters are adapting, innovating, and rebuilding the framework for handling pandemic-related risks.

The Pre-Pandemic Playbook: Why Traditional Models Failed

For generations, underwriting thrived on the law of large numbers and the principle of risk diversification. The core belief was that while individual policies might incur losses, widespread, simultaneous losses across an entire portfolio were improbable. Pandemics were often treated as theoretical, high-severity but low-probability "black swan" events, sometimes explicitly excluded or inadequately priced.

The Three Pillars of Failure:

• Correlation, Not Diversification: A pandemic creates a correlated shock. It doesn't matter if you insure restaurants in New York, hotels in Paris, and event planners in Tokyo; they all suffer simultaneously. Geographic and sectoral diversification, a classic underwriting defense, failed.
• Silent Contagion in Financial Lines: The virus exposed a "non-physical contagion" in lines like Directors & Officers (D&O) liability, business interruption, and trade credit. A government-mandated lockdown wasn't a fire or flood, but it triggered massive business interruption claims, while market volatility and bankruptcies spurred a surge in securities class-action lawsuits.
• The Exclusion Ambiguity: Many policies had vague or untested pandemic exclusions. The fierce legal battles over business interruption coverage, particularly the interpretation of "physical damage," highlighted a critical gap in contract clarity. Underwriters learned that what isn't explicitly defined can become a monumental liability.

The New Underwriting Toolkit: Precision, Exclusions, and Scenario Planning

In response, underwriters have moved from a reactive to a proactive stance. The new approach is less about predicting the next pandemic and more about building resilience against a spectrum of systemic shocks.

1. Hyper-Granular Data and Digital Footprints

The blanket approach is dead. Underwriters now drill down into specifics with unprecedented detail. For a restaurant, it’s no longer just about location and revenue; it’s about square footage, ventilation systems, the percentage of revenue from takeout and delivery pre-pandemic, online review sentiment, and even the adoption of contactless technology. Wearable device data for health or life insurance, supply chain mapping for commercial policies, and real-time mobility data are becoming part of a new, dynamic risk assessment model. The goal is to distinguish between businesses and individuals based on their inherent resilience and adaptive capacity.

2. The Explicit Language of Exclusions and Sub-Limits

Clarity is the new watchword. The post-COVID policy wording is meticulously crafted. Broad exclusions for "viruses," "communicable diseases," or "pandemics" are now standard in many property and business interruption policies. Where coverage is offered, it is often through specific, standalone pandemic insurance products or as a buy-back endorsement with strict sub-limits and higher deductibles. This ensures the risk is explicitly recognized, narrowly defined, and priced accordingly, avoiding the coverage ambiguity that plagued the industry.

3. Stress Testing and "What-If" Scenarios

Underwriters are now permanent residents of "what-if" land. They employ sophisticated scenario analysis and stress testing, moving beyond historical loss ratios. Questions like, "What if a pathogen with a 10% fatality rate but high transmissibility emerges?" or "What if a future lockdown lasts six months instead of two?" are modeled against portfolios. This helps in understanding accumulation risk—the total potential loss from a single event across all policies—and setting appropriate aggregate limits to protect the insurer's solvency.

Sector Spotlight: Where the Battle is Fought

The impact and underwriting response vary dramatically across sectors.

Commercial Property & Business Interruption (BI):

This remains the epicenter. The standard ISO form in the U.S. and its equivalents globally are being rewritten. Standalone parametric pandemic insurance is gaining traction, where payouts are triggered by objective parameters (e.g., a government-declared state of emergency or a certain drop in national GDP) rather than proven losses, speeding up claims but requiring new modeling expertise.

Healthcare & Life:

Underwriters are closely monitoring long COVID or post-acute sequelae of SARS-CoV-2 infection, which presents a chronic, long-tail liability for disability and health insurers. Medical stop-loss policies now scrutinize pandemic preparedness of provider networks. Life insurance, after initial shock, has seen more nuanced pricing, with a greater focus on individual health metrics and occupation.

Travel & Event Cancellation:

This sector has been rebuilt from the ground up. Policies now feature specific exclusions for known outbreaks, travel advisories, and fear of travel. Coverage is more modular, allowing travelers to purchase named-perils cancel-for-any-reason (CFAR) upgrades at a premium. Flexibility and clarity are paramount.

Cyber Liability:

The pandemic accelerated digital transformation, which expanded the attack surface. Underwriters now assess a company's remote work security protocols, the resilience of its cloud infrastructure, and its preparedness for ransomware attacks that could cripple operations already strained by a health crisis. The intersection of a pandemic and a cyber-attack is a nightmare scenario actively planned for.

The Future: Collaboration, Capital, and the Search for Resilience

The underwriting community recognizes that some risks are too vast for the private market alone. The conversation has shifted towards public-private partnerships (PPPs). Models like the U.S. Terrorism Risk Insurance Act (TRIA) are being discussed for pandemic risk, where the government would act as a reinsurer of last resort for catastrophic losses beyond a certain threshold. This would provide the market certainty needed to offer coverage while protecting taxpayer funds.

Furthermore, the role of insurance-linked securities (ILS), such as pandemic bonds, is being re-evaluated with more robust triggers. The industry is also championing policyholder resilience, offering premium incentives for businesses that develop robust continuity plans, diversify supply chains, and invest in health safety measures.

Ultimately, the pandemic has taught underwriters a humbling lesson: the past is no longer a reliable prologue. The modern underwriter is part data scientist, part scenario planner, and part policy architect. They are no longer just pricing risk; they are actively defining the boundaries of insurability in an age of interconnected global threats. The goal is no longer to avoid the next storm, but to design vessels—and portfolios—that can weather it, ensuring that the insurance industry remains a pillar of stability in an increasingly unstable world.