House Democrats and insurance groups have revealed separate plans for pandemic-related business interruption insurance and neither approach is generating much enthusiasm among Republicans.
The Democratic approach is modeled after an existing program that insures companies against domestic terrorism attacks, while the industry groups drew up a plan that would function more like a fund than insurance. Each aims to cover business losses related to the Covid-19 pandemic.
Many companies purchase business interruption insurance designed to cover losses due to closures because of natural catastrophes. Most existing policies include language excluding closures due to communicable diseases or other health-related concerns, leaving the industry as well as state and federal officials struggling to figure out a way to provide viable future coverage.
Observers say the approaches offered by both House Democrats and insurance groups fall short of requiring the sort of broad participation and more balanced burden-sharing between government and industry necessary to pay for future pandemic-related losses.
Republicans are already casting doubts on both approaches, which they argue rely on flawed government-run insurance programs, said Rep. Blaine Luetkemeyer, R-Mo., who serves on the House Financial Services Committee.
“I think at this point that there’s a lot of work to be done on both of them before we can take them seriously,” Luetkemeyer told Bloomberg Law in an interview.
The program envisioned by Democrats, called the Pandemic Risk Insurance Act, or PRIA, is structured like a post-9/11 insurance program that puts the federal government on the hook for losses attributed to a domestic terrorist attack.
Insurers offer such policies to protect businesses against property damage and business interruption in the case of a domestic terrorist attack. If losses exceed $200 million across all affected insurers, the government steps in to pay the difference.
PRIA would work in a similar way.
Insurers would offer policies that cover damages and business losses as a result of business closures after a 5% deductible is paid by the policyholder to the insurer. Claims would be split, with the insurer paying 5% of losses while the government pays the other 95%, with a $750 billion cap.
“Without a government backstop for this insurance, it’s not clear that insurers would or could cover pandemics,” Rep. Carolyn Maloney, D-N.Y. said during an online press conference May 26. “But with this backstop, the insurance industry will have more certainty, and we’ll be able to safely underwrite this unique risk,”
While Maloney said no Republican has signed onto her bill, she is in active discussions with several GOP members.
“I think it’s time we sit down at a table and work out our differences and get a product that we can all support and move forward,” she said.
Luetkemeyer said he and other Republicans are open to the idea, but he’s concerned that insuring pandemics is nearly impossible given their unpredictable nature.
Luetkemeyer doubted that any insurance company would be able to forecast the potential risks and price insurance products appropriately to that risk.
“The program that she’s outlined, quite frankly, in my mind has got a lot of problems with it,” he said. “I just really don’t see that it’s got much of a chance of working.”
Paul Newsome, managing director at Piper Sandler, an investment bank and financial services company, said Maloney’s plan does a good job of spreading risk across the government and insurance industry—but businesses aren’t likely to buy pandemic policies if PRIA is completely voluntary.
He pointed to the low take-up rate among businesses after the government backstop for terrorism risk was established in 2002.
“There is a lot of people that especially wouldn’t get covered under a PRIA-type structure,” Newsome said.
As an alternative, three insurance industry groups—the American Property and Casualty Insurance Association, Independent Insurance Agents & Brokers of America Inc., and National Association of Mutual Insurance Companies—introduced their own proposal last week.
Jimi Grande, senior vice president of government affairs for the NAMIC, said congressional Democrats looked to the “shelf” for a solution. But pandemics, Grande argued, are not insurable risks.
“I think they sort of tortured the TRIA program to work for pandemic risk without ever really stopping to try to ask the tougher questions of ‘what problems are we trying to solve here,’” Grande said.
The groups proposed establishing a fund that companies would pay into to help them cover losses from interrupted business operations. If the requested withdrawals exceed the amount in the fund, the government would step in to cover the shortfall.
The proposal, called the Business Continuity Protection Program, would be administered by the Federal Emergency Management Agency with payments facilitated by insurance companies.
The program would provide business “revenue replacement assistance” that would reimburse up to 80% of payroll, benefits, and expenses for three months, according to the proposal.
A Third Way
Howard Kunreuther, co-director of Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania, said Maloney’s plan would require the government to take on too much risk with 95% of losses, while the industry groups’ proposal gives insurance companies too small a role.
Kunreuther, who is developing his own ideas for structuring a pandemic risk insurance program in a paper he plans to release next week, said any solution must have broad participation to share the risks.
A PRIA-like structure would need to have policyholders bear the costs of premiums and a deductible, while the insurance industry would cover claims after deductibles are met. The key part of Kunreuther’s plan is to mandate reinsurance and other risk-transfer mechanisms so insurers have a level of protection against massive claims that could wipe out earnings.
After those are exhausted, the government steps in to fill the gaps.
“Let’s talk about what could be feasible, but to move in these extreme directions do not seem like a very good starting point to me,” he said.