April 7, 2020 Reading Time: 4 minutes

If Americans enjoyed more economic freedom, they would already be inundated by advertisements for COVID-19 life insurance, probably in the form of term policies. They might also already have seen infection insurance that would offer a payout to all those who test positive for the new virus, but higher levels of asymmetric information would make that product much more difficult to properly price.

One reason Americans panicked as the coronavirus spread throughout the land was a concern for the well-being of loved ones should they perish. Estimates vary but approximately two in five American adults own no life insurance and only three in ten have an amount considered adequate by personal finance experts and with recent stock market declines even many of those probably feel underinsured at present.

The widespread availability of COVID-19 insurance alone would help to quell fears and to reduce calls for government aid, which of course is extremely problematic given the already stressed position of the central bank and federal fisc.

Moreover, insurers would also produce independent estimates of COVID-19 morbidity and mortality. That is important because some public health officials may have incentives to overstate or underestimate the number of cases and their severity. Individual insurers have incentives to underestimate cases, say by arguing that granny died of heart, renal, etc. failure instead of the virus in order to avoid claim payment, but competition, reputation, and fear of lawsuits or regulatory action would drive industry statistics toward true figures.

One might wonder how insurers could develop actuarially sound premiums when faced with a dearth of information. First, they would have incentives to use all available data to develop actuarial tables as accurate as possible at every age and location. When data is too sparse, insurers can sell participating policies, i.e., policies that charge a conservatively high premium upfront but rebate any excess profits post-crisis. They can also slough off risk with pools, reinsurance treaties, and/or “death bonds” sold in the Alternative Risk Transfer Market (ARTM).

Although most Americans are too statistically challenged to make sense of actuarial tables, public policy experts could translate them for mass and social media consumption. Moreover, the direction of premiums would provide clear signals about trends as most people can figure out that premium declines (increases) mean less (more) likelihood of death from COVID-19.

It is true that insureds will take more risks but in this case that is a good thing because that means less irrational panic behavior will occur. Some high-risk activities, like knowingly consorting with a person who has tested positive for COVID-19, would void the insurance. Other activities, like traveling to a COVID-19 hotspot, could be priced instead of outright banned. Got a billion-dollar deal in Manhattan? Good for you, insurers could respond, but it will raise your premium $XXX, or reduce your benefit $XX,XXX, if you want to retain your coverage.

Life insurance is relatively easier to price than infection insurance because an insured is either alive or dead and it is fairly easy to discern the difference, zombies aside. One could fake having COVID-19 especially in the absence of effective testing or even bribe healthcare officials to certify a positive result. But, here again, the incentives of insurers to develop cheap, accurate tests simple enough to be taken by claims representatives in the field would have provided a valuable public service by offering tests outside the purview of the federal government. For the most part, states regulate insurers in the United States and there could be no objection to the development of a parallel private testing system used, putatively at least, only to adjudge contract performance.

Readers who find this discussion fanciful or theoretical need to study the history of insurance, an important subfield of financial history that has grown considerably over the last two decades or so but remains underappreciated. Insurance historians have shown that insurers were responsible for many improvements in people’s lives throughout the globe but especially the United States.

Most importantly, perhaps, fire insurers sped the transition of North America’s cities from wooden tinderboxes into fire-resistant natural wonders by developing safety codes and charging high premiums to factories, bakeries and restaurants, and homeowners who did not follow them. American cities no longer burn to the ground because fire insurers moved faster and further than government fire code policymakers.

Unfortunately, Progressives assumed control of motor vehicle licensing and registration before nascent automobile insurers did; otherwise there would be no DMVs and drivers licenses would be issued on driving abilities instead of age and the ability to see, pass simple tests, and wait in long lines. Readers who doubt that should investigate automobile safety testing. Government tests remain rudimentary while the much more sophisticated ones conducted by the insurance industry are the ones to study if concerned about the real world safety of oneself and one’s family.

Insurers could do much more if they were less heavily regulated. Most importantly, perhaps, they could help to reduce some of the problems associated with unequal distributions of wealth and income. The ability to pay premiums inflated by excess regulatory costs and to self-insure (go without insurance) increase with wealth. Affordable insurance helps to level the playing field by allowing less wealthy individuals and smaller firms to transfer risks they are unable or unwilling to bear themselves to insurers.

Of course existing insurance policies, like short-term disability policies, cover various aspects of the COVID-19 crisis. Moreover, individuals can buy general life insurance that would cover them in the event that they died from COVID-19 and many simple policies can be purchased online. But COVID-19 risk is not being individually priced and insurers are undoubtedly wary of adverse selection, i.e., individuals at risk of dying from COVID-19 buying general policies at premiums that do not yet account for the pandemic due to regulatory and other hurdles.

Blockchain insurance and other potential FinTech workarounds remain in their infancy as few consumers yet know how these technologies work or where or how to search for products. Companies do not know how to market such products or inform consumers without running afoul of regulators or hiring expensive licensed agents and brokers.

Insurance is no panacea but the availability of COVID-19 mortality and/or morbidity premium data would provide consumers, media, and policymakers with important information about the expectations of insurers and other parties (like death bondholders) with incentives to create accurate predictions. The existence of such insurance would help to quell fears by allowing underinsured households the opportunity to protect their incomes. Perhaps most importantly, deregulation would incentivize insurers to develop private pandemic testing and reaction services that may prove superior to those offered by government and at the very least provide a backup in the case of government failure.

Robert E. Wright

Robert E. Wright

Robert E. Wright is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s The Best of Thomas Paine (2021) and Financial Exclusion (2019). He has also (co)authored numerous articles for important journals, including the American Economic ReviewBusiness History ReviewIndependent ReviewJournal of Private EnterpriseReview of Finance, and Southern Economic Review. Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997. Robert E. Wright was formerly a Senior Research Faculty at the American Institute for Economic Research.

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