P/C Insurers Back a Federal Pandemic Loss Fund But Not a Backstop Like TRIA

By | May 19, 2020

Property/casualty insurance carrier groups are developing a proposal for a federal program to replace revenues lost by businesses shut down during pandemics like COVID-19, but their program won’t be modeled after the Terrorism Risk Insurance Act as some have urged.

Before the week is out, there could be at least three federal pandemic proposals for lawmakers to consider.

Jimi Grande, senior vice president of government relations for the National Association of Mutual Insurance Companies, revealed that NAMIC and the American Property Casualty Insurance Association (APCIA) could have a joint proposal ready to send to lawmakers as early as this week, even as other industry groups are lending their support to the alternative Pandemic Risk Insurance Act of 2020—a proposal modeled after TRIA.

Last Monday, the American Academy of Actuaries sent a letter to federal lawmakers endorsing the TRIA-like idea of limiting insurers’ exposure to pandemic-related business interruption risk with a federal backstop to cover the extreme losses above a cap.

The actuaries echoed concerns voiced by insurers about putting coverage for pandemic-related shutdowns into business interruption coverage parts of insurance policies but endorsed the idea of a TRIA-like backstop. The letter, signed by Lisa Slotznick, Academy vice president, Casualty, said that “pandemic risk is more similar to the catastrophic risks covered by programs like the Terrorism Risk Insurance Program and the National Flood Insurance Program than to risks normally insured by the commercial insurance market, and any new federal program seeking to facilitate pandemic risk coverage should reflect that difference.”

PRIA For ‘Communicable’—Not ‘Communicative’ Disease Risk

A proposal making rounds in the U.S. House of Representatives to “establish a Pandemic Risk Reinsurance Program” would involve “shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease,” according to a May 11 discussion draft reviewed by Carrier Management.

Losses from “a pandemic or outbreak of communicative disease” were covered in an April 3 draft (emphasis added).

The minor spelling mistake in the more recent version of a discussion draft the Pandemic Risk Insurance Act of 2020 isn’t the only error Carrier Management spotted in comparing the two documents.

The biggest change is an increase in the annual aggregate cap on losses to $750 billion from $500 billion.

Others changes include:

  • The definition of a covered public health emergency. While both drafts define it as an emergency declared under the Public Health Service Act, the earlier draft also requires a major disaster to be declared by the President; the later one requires that it is certified by the Secretary of Health and Human Services as a public health emergency.
  • The requirement for a participating insurer to pay premiums into a risk reinsurance fund—based on actuarial cost—is gone in the May 11 draft.
  • Language relating to event cancellation insurance has been added to definitions of property/casualty insurance and business interruption insurance.
  • The later draft adds a provision for terminating the program in seven years.

What hasn’t changed?

In general, both drafts differ from the Terrorism Risk Insurance Act in that insurer participation in the pandemic plan is voluntary. No losses are paid under the program described in either draft until aggregate industry insured losses exceed a $250 million aggregate trigger. The federal share of losses is 95 percent of insured losses above each insurer’s deductible defined under the program. The insurer deductible is defined as “the value of the participating insurer’s direct earned premiums during the immediately preceding calendar year, multiplied by 5 percent” in both drafts.

In mid-April, Rep. Mike Thompson, D-Calif., introduced a different bill, the Business Interruption Insurance Coverage Act of 2020, requiring insurers offering business interruption insurance to cover pandemic interruptions and nullifying preexisting exclusion unless insureds authorize reinstatements of exclusions in writing or fail to pay increased premiums charged for the coverage.

The letter addressed to the Reps. Maxine Waters and Patrick McHenry, the chair and ranking member of the House Committee on Financial Services, specifically weighed in on an April 3 discussion draft of a House bill for a federal PRIA program. The actuaries opposed the use of the term “actuarial cost” in draft language that had called for insurers to pay premiums for the reinsurance coverage of a federal backstop.

However, while NAMIC and APCIA, the two major property/casualty insurer trade organizations, agree with the ideals behind the creation of PRIA, they disagree on using TRIA as the model, at least by itself. Rather, insurers believe that losses for future pandemics should be fully paid by the federal government—not backstopped.

“We believe that there needs to be a long-term prospective government program, so that the country’s not put in this type of situation again,” Grande said. “I think, however, what Congress tends to do [is to] look at what’s on the shelf,” Grande said, and what’s on the shelf — TRIA— isn’t entirely applicable here.

“The pandemic risk is fundamentally different from a terrorist attack,” Grande said. “Terrorist attacks, as awful as they are, do have limits in geography. They have limits in scope and frequency. This pandemic would be like having 9/11 every day for 60 days or 90 days.”

Insurers don’t think that the risk-based approach to insurance underwriting works for pandemics. While the risk-based approach provides valuable price signals in most markets, including the market for terrorism, there is “a misalignment of goals, in our opinion,” when talking about a public health response.

He said the goals are different in a pandemic “because it’s a public health crisis. So, it doesn’t lend itself to some of the underlying characteristics of insurance.”

In general insurance markets, insurers charge higher rates to those industries most likely to have the highest risk. “Rather than charging higher rates to those industries, [insurers] might otherwise structure policies to discourage ceasing operations,” he said. “You would want to have mitigation in place and you would want to discourage claims. You would want to discourage companies from closing.”

But, he said, that is the “opposite of what you probably want to do in a pandemic—where you want to provide incentives that encourage industries that could serve as vectors of viral transmission to close.”

Turning to the scope of the problem, Grande said that the federal government outlay is several trillions of dollars, referring to the economic rescue of the CARES Act, with more possibly on the way. “When people say, ‘The government is going to have to be the solution in the next pandemic,’ there is no other option. No other industry or entity is large enough, or capable, to deal with something of this size and scope,” he said.

“One way or another, we’ve got to get the federal government organized so that it has a playbook if this happens again,” Grande said. “We think that torturing the TRIA program to make it work for pandemics probably isn’t going to be the model that works, at least by itself. It could be a part of a solution.”

Actuaries Weigh In

While the Academy of Actuaries accepts the premise that a TRIA-like mechanism could work, it specifically critiqued a reference to actuarially determined premiums for insurers to pay to the government for reinsurance.

“Using the term ‘actuarial cost’ implies a degree of certainty about the risk and the ability to estimate the expected cost of future pandemics. However, there is no basis for calculating either the frequency of future pandemics or the likely cost of [business interruption] losses due to future pandemics,” Slotznick’s letter states. Even if it were somehow possible to calculate the frequency and severity of such events, “it is impractical for insurers to set aside dedicated financial resources to pay those massive claims, which could be decades in the future….”

Like NAMIC, the Academy noted the magnitude of the dollars Congress has already appropriated to help businesses suffering pandemic-related losses, and said that expecting P/C insurers to assume responsibility for the next pandemic would add costs into future rates.

“Loading the estimated full cost of pre-funding payment of claims for business interruption in the next pandemic event—including the proposed new Pandemic Risk Reinsurance Program—onto the [business interruption] insurance contract would grossly distort the cost of that product and make it impractical for consumers. We do not think this is your intent, so we recommend revising the draft language,” the Academy advised.

Separately, in late March, John Doyle, president and chief executive officer of broker Marsh, sent his own letter to leaders in the U.S. House, including Speaker Nancy Pelosi, offering Marsh’s assistance in developing a public-private risk program partnership. Highlighting Marsh & McLennan’s expertise in helping the World Bank structure pandemic risk bonds in 2017 and Marsh’s development of PathogenRX, business interruption coverage based on a parametric trigger for industries like hospitality and retail, and the role Marsh played in developing TRIA, Doyle wrote that the basic framework for the pandemic partnership would involve risk-sharing among policyholders, insurers and the federal government with details of triggers and limits to be worked out in collaboration.

Coincidentally, the Academy’s letter is dated May 11—the same day that lawmakers released a new discussion draft of the “Pandemic Risk Insurance Act of 2020” that dropped the only reference to “actuarial cost.” A copy of the May 11 draft obtained by the Academy and shared with Carrier Management omits the provision for insurers to pay premiums for the federal Pandemic Risk Reinsurance Program, which had included the phrase. (See sidebar, “PRIA For ‘Communicable’—Not ‘Communicative’ Disease Risk” for other ways in which the May 11 and April 10 drafts differ.)

To allow carriers to put business interruption coverage of pandemic risk in future insurance policies, “a good approach is to follow the pattern of other successful federal programs that place the more predictable portion of the financing of the program in the pre-event period while the less predictable portion of the financing is placed in the post-event period,” the Academy letter says. It suggests that components of a new program should:

  • Cap the amount of financial risk the insurance industry—primary insurers and reinsurers—is expected to absorb.
  • Create a mechanism for the U.S. Department of the Treasury to provide temporary unlimited funding if claims exceed that cap.
  • Provide a plan for the Treasury potentially to be reimbursed after the event.

The actuaries, who “estimate the cost of insurance policies,” also see cite complications related to insuring pandemics, including the inability to geographically diversify risk portfolios for boundless pandemics and the presence of correlations between pandemic losses and asset value declines which impact the financial wherewithal of insurers to pay claims.

An Alternative Proposal

NAMIC cited similar issues in a two-page document it sent to lawmakers in which it proposes a Federal Pandemic Loss Program instead of PRIA.

As envisioned, the FPLP would be a federal facility that fully backs future losses due to pandemic response initiatives, providing direct funding to businesses through a “predetermined formula to provide voluntary revenue replacement assistance to help businesses retain employees” and to keep them solvent, the document says. A parametric trigger would activate payments directly to businesses once the nation reached a prescribed level of pandemic response.

Noting that the outline of how this could work is still in development, Grande could not share anything more specific with Carrier Management during an interview yesterday. “Essentially, [we’re] trying to figure out a way that businesses could participate in a program with the government where they could find revenue replacement assistance should this ever happen again,” he said summarizing the basic idea.

Adding to concerns about insurer involvement in pandemic-related business interruption coverage, the Academy of Actuaries questioned whether the P/C insurance industry has the operational capacity to handle claims. Unlike the case for hurricanes and other natural catastrophes, for which insurers redeploy personnel to affected locations from unaffected areas, there might be no unaffected areas during a pandemic event, the Academy’s letter notes.

While two PRIA discussion drafts have been circulating already, Grande has heard that PRIA may be formally introduced this week but that overall he expects Congress tio take its time on any proposals.

“There’s a chance, by the end of this week, that there are two proposals and programs out there that should, in our opinion, start a very thoughtful dialogue. [But it] shouldn’t move too quickly,” he said. “We’re still in the middle of the crisis so the idea that we’re going to put together the solution for the next crisis is probably a little premature. This is complex stuff, and businesses and taxpayers and the insurance industry are all going to have a lot at stake. It should be a thoughtful process to get it right.”

He noted that it not until about 14 months after 9/11 that TRIA passed. “It wasn’t readily obvious that it was going to be needed,” he said, recalling that the impetus for TRIA was the inability of real estate developers to get loans for projects they couldn’t insure because insurers didn’t understand a risk that was “tantamount to an act of war.”

Grande continued, “They found a way to create an insurance-like program that was a risk-based approach to the solution for an event that, as big as it is, was limited to a single place” or just a few locations.

“We’re not opposed to helping America keep businesses running during the next crisis,” Grande said. “We’re just saying they need to slow down and be a little more thoughtful in terms of the approach to how this works.”

“This is the first time we’ve ever dealt with something of this size and scope. It’s probably going to need to be something uniquely designed for pandemic and viral risk,” he said. The solution may have some components similar to other federal programs, including TRIA, “but the notion that a typical risk-based model is going to work, we think is wrong,” he said..

“We think the problem needs to be solved. We just don’t think PRIA is going to work, likely, for the policyholders or the insurance industry,” Grande concluded. “We need something though. And honestly, the more proposals that are out there, the more rich the discussion, the more smart people that think about this, the more likely we are to get to the best solution for the country.”

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