COVID-19: managing a pandemic risk with a Non-physical Damage Business Interruption policy

Pandemic risks, such as Covid-19, are difficult to insure because they are characterized by multiple risks and losses that can affect a variety of enterprises and people at the same time. Insurers are unable to generate accurate pricing due to a lack of time series and granular statistical data. To address the pandemic risk posed by the spread of Covid-19, we present a model of Catastrophe Risk with Non-Damage Business Interruption Policies (NDBI). The model entails a Monte Carlo simulation of various shutdown situations, as well as the frequency and severity of losses suffered by Italian SMEs. The research emphasizes the relevance of NDBI policies for both the firms - which can cover their losses - and insurance companies - that can achieve a profit margin thanks to the reinsurance.