House Democrats are proposing a federal reinsurance program designed to widely shield large and small businesses against the ravages of the coronavirus pandemic.
The program, still in the early stages of negotiation, would mirror an existing federal backstop for terrorism risk created in the aftermath of 9/11, and could be part of the next congressional relief package, according to a draft proposalcirculated by House Financial Service Committee Democrats.
The need for a program is acute as lawsuits stack up across the country between shuttered businesses and insurers over whether existing business interruption insurance policies have virus and bacteria-related exclusions. The insurance industry argues most property/casualty policies don’t cover pandemics and the store closures, event cancellations, and revenue losses that follow in their wake.
The scope of the program could provide immediate relief now, and protect businesses against future pandemics by incentivizing insurance companies to offer broad-coverage products with the backing of the U.S. government.
“We recognize there may be a need for new vehicles to promote insurance in tricky settings,” said Laura Foggan, chair of Crowell & Moring’ LLP’s insurance practice.
Global pandemics, with their widespread impact across industries and geographies, are quickly emerging as one of the trickiest areas to insure. A federal backstop would encourage insurers to cover at least some parts of this kind of risk in a way that would “protect insurers who would be forced to pay an extraordinary number of claims,” Foggan said.
Terrorism Risk-like Mechanisms
The draft proposal, obtained by Bloomberg Law, shows that the House Financial Services Committee is looking to include a pandemic-risk insurance program “in order to promote the availability and affordability of insurance coverage that includes pandemic risks.” If the provision makes it into the next package, it would be the third large federal property-casualty insurance program created by the federal government.
“I think we need to step up to the plate right now,” Rep. Emanuel Cleaver (D-Mo.) said in an interview this week. “We’ve got to provide insurance to the insurance providers so that they don’t exceed their capacity.”
The pandemic program would be similar to the Terrorism Risk Insurance Act, or TRIA, which provides a government guarantee to insurance companies providing products that protect companies against damages caused by domestic terrorist attacks, according to the draft. TRIA is triggered when losses across all affected insurers reaches $200 million. Since the program’s inception in 2002, it hasn’t been used.
Cleaver, who also serves as chair of the committee’s National Security, International Development, and Monetary Policy Subcommittee, said Congress had tried to add the program into past relief packages, but haste to complete the first three packages outpaced negotiations.
But the former Housing and Insurance Subcommittee ranking member said that there is a strong push from committee Chairwoman Maxine Waters (D-Calif.) to include it in the next relief measure.
Rep. Carolyn Maloney, (D-N.Y.), a senior member of the panel and chairwoman of the House Oversight and Reform Committee, circulated a letter among House members to drum up support for the program. In the letter, Maloney describes a “system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”
Maloney said in the letter that the provision would require insurance companies to offer business interruption insurance policies that cover pandemics, and would create a Pandemic Risk Reinsurance Program to “ensure that there is sufficient capacity to cover these losses and protect our economy in the event of a future pandemic.” The government would act as a backstop for the program to maintain stability and share risk with insurance companies.
The program would likely be funneled through the Senate Banking Committee and need bipartisan support to clear both chambers. A spokesperson for Sen. Mike Crapo, (R-Idaho), and chairman of the committee declined to comment.
Four other Republican offices didn’t return requests for comment. Advocates for the program said they’re optimistic that the end proposal would be bipartisan.
Government Backstop Needed
As the coronavirus continues to wreak havoc on the U.S. economy, there is a growing chorus among insurers, academics, and businesses for Congress to create the program, as near-shuttered companies scramble for liquidity to keep their businesses open.
John Doyle, president and CEO of the insurance unit of Marsh & McLennan Companies Inc., sent a letter to Congress and the White House offering the company’s advisory services to help the government create a federal pandemic backstop. Doyle wrote in his March 30 letter that a federal program could be structured as a risk-sharing model between policyholders, insurers, and the federal government.
Doyle proposed that policyholders absorb initial losses up to specified deductibles in their policies. Then, insurers would provide business interruption coverage between that threshold and a higher limit set by Congress. After those claims are cleared, the federal government would then backstop the overall program by “bearing a portion of the damages above a certain level,” Doyle wrote.
Cleaver said without a federal, TRIA-like backstop, insurance companies won’t offer wide pandemic insurance that businesses now—and in the future—need.
“What we hope to do is provide a backstop as we do for TRIA because otherwise, you’re going to see insurance companies going out of business,” Cleaver said. “What we are talking about is reinsurance to protect insurance companies.”
But details on what the threshold may be before the government steps in is still in the works, Cleaver said.
At issue is the balance between making it affordable for companies to purchase the policy, and letting insurance companies make a profit rather than bearing the full brunt of losses.
Zachary Finn, a risk management and insurance professor at Butler University, said he has been fielding calls from lawmakers, the White House, insurance companies, and businesses for help shaping how to create the program.
Finn said the easiest and fastest option would be to combine the program with TRIA and backdate the coverage to the pre-coronavirus era. In addition, FInn proposed that any company that declined to purchase or were denied coverage could buy it—for a higher price.
“You get money into people’s hands exactly the way they need it in a known mechanism,” Finn said. “When you do it that way, all of a sudden, everybody has pandemic insurance, or at least as much as it is in TRIA.”