Property/casualty insurance industry carrier groups are working to develop a proposed federal program to replace revenues lost by businesses shut down during pandemics like COVID-19, but it won’t be modeled after the Terrorism Risk Insurance Act. (For an update on the plan released by the carrier groups, see related article, “Insurance Groups Team Up on Federal ‘Business Continuity Protection Program.’“)

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 might 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 “Pandemic Risk Insurance Act of 2020″—a proposal modeled after TRIA.

Last Monday, for example, 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.

Echoing concerns previously voiced by the carrier groups about putting coverage for pandemic-related shutdowns into business interruption coverage parts of insurance policies, 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.”

The letter addressed to 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, opposing 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.

NAMIC and APCIA believe that losses for future pandemics should be fully paid by the federal government—not backstopped, Grande confirmed, noting that the carrier groups wholeheartedly agree with the ideals behind the creation of PRIA. “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,” he said.

“I think, however, what Congress tends to do [is to] look at what’s on the shelf.” What’s on the shelf 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,” he said.

Grande also said the carrier groups don’t think that the risk-based approach to insurance underwriting works for pandemics. The risk-based approach provides valuable price signals in most markets, including the market for terrorism. “When you’re talking about a public health response, you have a misalignment of goals, in our opinion.”

Speaking about risks other than pandemics, he explained that 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. You would want to have mitigation in place and you would want to discourage claims.”

“You would want to discourage companies from closing, which 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.”

“Your 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.”

Turning to the scope of the problem, Grande noted that the federal government outlay is several trillion 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

Accepting the premise that a TRIA-like mechanism could work, the Academy 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. And 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 “must come with the appreciation for added costs that would be built 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”

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, suggesting 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 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 that 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 early on, which also 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.

“People forget [that] it was around 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.”