Recently I read, “We can protect the economy from pandemics. Why didn’t we?”, an article by Evan Ratliff, in the June 16, 2020 edition of Wired Magazine.
The essence of the article concerns insurance, or rather the lack of it, to protect businesses and individuals from the disastrous effects of pandemics.
Most of us pay for all sorts of insurance: Life, fire, auto, liability, flood, windstorm, theft, healthcare, the list is long. But there is no private pandemic insurance.
In fact, pandemic coverages specifically are omitted from most insurance policies.
The foundation of any insurance coverage is statistics — the probability that a covered event will occur and how soon, and the cost to the insurer of that event.
Life insurance, for instance, is based on time. The death event is 100% certain to happen, and the amount of coverage is known.
But the variable, time until death, tells the insurance company how much it needs to earn on premiums, before paying the death benefit.
Fire insurance is based not only on time but on the likelihood of the event ever occurring. The ultimate cost limit is specified by the policy.
Pandemic insurance has not existed because:
- The payout could be so enormous as to bankrupt carriers
- Premiums would have to be enormous, thus discouraging purchase
- The event itself is so rare it would discourage purchasers, further.
A few excerpts from the Wired article:
Gunther Kraut, a mathematician by training, was working at Munich Re, one of the world’s largest reinsurers.
Reinsurance is the business of insuring insurers. The local and national insurance companies that you and I buy life or auto coverage from—the Geicos and Allstates of the world—need their own protection against rare but catastrophic events that might create enough claims to bankrupt them.
Reinsurance companies provide that backstop on insurance for everything from homes and infrastructure projects to business losses and individual lives.
Munich Re had a risk problem of its own: namely, the possibility of a global pandemic. I
“Let’s take the example of car insurance,” Kraut told me. “That’s a very, very stable business.” A local company might insure tens of thousands of cars, each with a certain probability of having a small accident.
“You can predict very well how much money you will have to pay on the claim settlements, and hence how much premium you will need to collect,” he said.
But let’s say that one year there is a freakishly large hailstorm in Bavaria, damaging half the cars in the portfolio. The resulting claims could be an extinction-level event for an insurance company.
Such storms may occur statistically only once every three decades—a one-in-30-year event, in risk parlance—but every car insurance company would have to keep enough cash on hand to pay out on claims on half its cars, just in case. “That’s a lot of money you need to put aside for something that happens very rarely,” Kraut said.
The more car insurers that Munich Re adds to its portfolio, in more geographical regions, the more it can convert a rare and expensive risk into a predictable and cheaper one for itself.
Kraut said. “That’s why reinsurance companies are global companies.”
“Insurance is sold, not bought,” the industry saying goes, and pandemic insurance would be both novel and quite expensive—potentially millions of dollars on top of what the company was paying for insurance.
No CFO was eager to be the first among their competitors to take on a significant new cost.
Potential insurance clients will say, ‘OK, we understand why this could potentially be such an impact. But we haven’t seen an event like this in 100 years. Why do we need to care about it now?’”
The statistics of insurance all merge on payout cost and premium income. A policy must be predicted statistically to payout less than premiums, in order to provide a profit to the insurance carrier.
Yet here is the COVID-19 virus, costing many trillions of dollars. How many insurance companies — or even group of companies — would be willing and able to absorb that risk? And, how many potential insureds would pay premiums that exceed that risk?
The answer to both questions probably is “zero.”
But what if there were an insurance company with the financial ability to absorb infinite financial risk?
And what if the premiums were $0.
Could such a combination make for viable insurance coverage?
As impossible as it may sound, such a combination does exist. The potential insurance company is the U.S. government.
Being Monetarily Sovereign, it has the infinite ability to create dollars and it needs no premiums. It could, at the touch of a computer key, pay out $1 trillion, $10 trillion, $100 trillion, any amount instantly.
And because these dollars would replace lost dollars, any discussions about inflation would be moot.
The U.S. government has the unlimited ability to cover the entire world’s losses, and using this ability would confer several benefits on the U.S.
- It would prevent worldwide recessions and depressions that otherwise result from pandemics. (See: How America Can Save The Entire World.“)
- It would help solidify the U.S. dollar as the world’s currency.
- It would strengthen U.S. financial influence, worldwide.
The problem is not the inability to foretell the next pandemic. The problem is not an inability to fund payment.
The real problem is to determine exactly to whom and how much payment should be made. Look at any fire insurance policy and you will see paragraph after paragraph detailing all the various eventualities.
Insurance underwriting experts devote their business lives to describing circumstances under which loss payments will be made.
That is the kind of information the U.S. Congress could use in writing the laws describing pandemic insurance coverage for the people and businesses in America.
While private insurance policies are based on income and outgo, i.e profits, a U.S. government program would be simpler in that it needs not consider income.
It needs only to consider outgo, the money paid to businesses and individuals for specific losses.
In one sense, the U.S. government could use “helicopter money,” just drop dollars anywhere under the assumption that eventually it will flow throughout the economy. And, in fact, the federal government’s efforts so far, have been quite similar to “helicopter money.”
The problem is that “helicopter money” tends to accumulate in the hands of the rich and powerful, rather than going to the people who need it most.
By enlisting the services of insurance underwriting experts, Congress and the President would receive guidance (if they would take it), about where the new dollars would more accurately replace lost dollars.
Replacing every lost dollar with a new dollar would help prevent a recession or a depression.
Additionally, we would need to do more than replace the old. We would need to implement the new: New methods of agriculture, manufacture, education, transportation, and entertainment that would not shut down because of a future pandemic or other similar events.
Here, specialized organizations such as the MacArthur Foundation and Future Science Group could be enlisted to help identify areas of investment.
The world has faced, and always will face, various catastrophes. Whether a huge, meteor, or a coronal mass ejection, global warming, global flooding, super-volcano eruption, or of course, a pandemic.
Any of these events can kill millions of people and destroy the world’s economies.
If governments, particularly the U.S. government, remain intact, the financial losses can be “insured,” and human disaster ameliorated.
The U.S. government has the unlimited ability to replace lost money with U.S. dollars, and by using those dollars, fund reconstruction.
Congress should make use of insurance underwiters, experts in determining circumstances under which benefits will be paid, to create appropriate underwriting laws for global catastrophes.
These laws could involve not only U.S. territory, but other participating nations.
Rodger Malcolm Mitchell
Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
3. Social Security for all or a reverse income tax
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually.
8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10.Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.