Risk= Hazard + Outrage

Insurance actuaries have a good record of reducing hazard to a mathematical exercise that can accurately surmise the chances of you being in a car wreck or dying in the next 12 months; but they are far less able to predict 9/11 or the Covid-19 pandemic with any degree of accuracy. You still want protection and assurances from these unpredictable tragedies.

Insurance companies usually exclude big and rare risks like terrorist attacks, acts of war or events like pandemics not because they are rare but because they are both more unpredictable and more systemic. Insurance companies insure risks that are rare for the individual but common for the population. Somebody is going to have a car wreck this week, but most of us will not. We all make a small payment to help out the unfortunate who wins the dire but predictable lottery because we all know that it could be our time next week. Pandemics and acts of war are enacted systemically- like everyone having an auto accident in the same week.

If you own a swimming pool you likely pay an addition premium for the added risk. You may also be asked to pay an additional premium for a terrorism rider if your home is destroyed in a terrorist act. A drowning neighbor is a real and alarming probability and you will gladly pay the premium; the terrorist rider seems much less likely and you may choose to reject that coverage. I am not sure of the difference between a terrorist or a vandal, unless a terrorist is just a vandal with a cause. (What happens if a terrorist drowns in your pool either before or after he blows up your house?)

You probably worry much more about the threat of a terrorist attack than the loss to a drowning in a neighborhood swimming pool, even though the chance of dying in a pool is much greater than dying in a terrorist attack. The difference is outrage. You will tolerate the inconvenience and cost of the TSA check before you board an airplane that you would never tolerate before going for a swim.

The fear from the Covid-19 virus seems excessive based on the number of cases and the mortality thus far. If we are uncertain of the mortality, then extreme precaution should be exercised but based on what we have seen thus far its risk seems only slightly more than the seasonal flu.

Shutting down large portions of the economy for months is an extreme solution and when the real cost becomes known we may revisit our decision. Our federalist structure is better suited to targeted and less extreme response. This response is more targeted to the outrage facet of risk than its real hazard; outrage is more of a factor of political risk than measurable hazards.

The cost added to a debt that has no restraint is yet to be determined. The firewall to excessive debt; a gold standard, fixed exchange rates, or moral sensibilities has long been abandoned and the time to rediscover these limits in not in the midst of a pandemic. Nor is it the time to take advantage of the funding to load the bill with political swag that has nothing to do with the urgent need.

With every airplane crash flight becomes safer. “From 1980 to 2013, air passenger fatalities fell from 100 per 100 billion passenger-miles to less than one fatality.” (Strain, Michael R.. The American Dream Is Not Dead ). The postmortem (no pun intended) analysis from our health agencies will study the cases and learn what worked and what did not. We will develop a vaccine, improve our hygiene habits, keep more toilet paper in the house on a regular basis. We will develop better procedures for recognizing contagions early and containing them quicker.

We will never know if we overreacted. If the threat turns out to be less than predicted, we will assume our actions were merited and responsible. It could be a dry run for a contagion that is far more lethal. Our agencies and professionals will always error on the side of overestimating an unknown threat to public health. Outrage and fear are hard risks to mitigate.