Blog: Pandemic - what is covered?

Graeme Trudgill

Biba's executive director, Graeme Trudgill, addresses the big question around business interruption and Covid-19.

Coronavirus has led to some of the most challenging times for our members and their clients. The British Insurance Brokers’ Association (Biba) team has been dealing with hundreds of enquiries ranging from BI cover to engineering inspection, to unoccupied properties and payment holidays. 

What is the answer?
This crisis takes me back to starting my CII studies where my first learning point was why it is unusual to comprehensively insure ‘fundamental’ risks.  

These are risks, mostly emanating from nature, that affect the vast majority of people and businesses.  When these occur, they affect a large group of people meaning the resulting losses are incalculable and cannot be risk modelled or capitalised for, making them commercially uninsurable such as war and nuclear risks.

Why is this case?  
Insurance is a mutual pool of funds that pay for the losses of the few, from the premiums of the many. Statistics on frequency and severity (cost) are used to maintain the pool, which is subject to regulation to maintain adequate solvency.

Pandemics, by their unpredictable, unforeseeable nature, cannot be modelled in the same way and do not follow the ‘losses of the few’ principle. That is why they are not easily covered in a standard insurance market business interruption policy. The predicted cost of Covid-19 is likely to exceed any possible insurance model.

Research from a Biba member showed cover for Covid-19 to be incredibly rare not just in the UK, but globally (a position since the effects of the Sars outbreak of 2003). 

Even where unspecified disease cover was offered within policies there was little take-up. This is not unusual for difficult to perceive risks - the recent DCMS cyber breaches survey showed only 11% of businesses purchased specific cyber cover.

Clients rely on brokers and insurers to cover their financial risks in suitable policies available in the market, but as has been proven recently. we have to manage expectations when some perils are uninsurable. 

Maybe innovation will be part of the answer with solutions such as parametric insurance or perhaps we need a move, as we have seen over the years, to something akin to the world-leading pooling models that have developed in the UK.

Should ‘Pandemic’ be considered a fundamental risk, mostly outside of the insurance market? Should shared industry/ government models be considered? Alternatively can the market pick this up?

I look forward to your views, which could be used to inform future strategy, as we wait for this public health crisis to abate and consider how we go forward from here.

Graeme Trudgill is the executive director of Biba.

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