How to develop a financial vaccine against future pandemics
Insurers had had better make sure Congress is aiming at the right target, before the insurance industry takes its one shot at a federal pandemic risk program
In 2006, the World Economic Forum’s inaugural Global Risks Report identified “global pandemics” as a Top 5 societal risk. Marsh, Swiss Re, and the report’s other contributors assessed there was as much as a 10% chance that a major outbreak would occur during the next decade.
In response, the insurance industry developed and widely implemented virus and pandemic exclusions such as ISO’s Exclusion of Loss Due to Virus or Bacteria (CP 01 40 07 06), released only months after the WEF report hit the streets. These exclusions, coupled with an insuring agreement typically requiring “direct physical loss of or damage to [property],” have so far saved the insurance industry from paying most COVID-19 business interruption losses.
Instead, insurers have been battling public opinion – and defending against some 1,500 lawsuits and counting. Much of the insurance industry’s initial response focused on educating why it cannot help businesses, nonprofits and local governments pick up the pieces in the wake of the pandemic as they had come to expect from insurers following hurricanes, wildfires, and other catastrophes.
Perhaps sensing insurance companies had their hands full justifying their limitations, Congress turned to the banks as the engine to drive distribution of $525 billion of Paycheck Protection Program benefits to more than 5 million recipients over a period of four months. While there is much to criticize about this program, the banks did step up in a time of national crisis. They delivered more than 6 times the amount of financial relief property insurers had distributed following Hurricane Katrina, in a fraction of the time, and without the benefit of trained catastrophe claims professionals.
A new Congress and a new Administration have some thinking to do about how to prepare for the next pandemic and who can be counted on to step up when that time comes again. The insurance industry ought to be doing some soul searching itself: is the insurance industry willing to defend its traditional ownership of catastrophe response? Or are insurers prepared to cede that role to the banks, which may soon realize the Paycheck Protection Program opened the door to financing catastrophe risks through innovative banking products such as forgivable lines of credit?
More importantly, insurance customers will not be impressed with glossy brochures describing global pandemics as a risk to watch. Policyholders need practical and effective tools to manage what is now a very real and undeniable risk to their financial survival.
In fact, businesses, nonprofits, local government, workers, and their families need what amounts to a financial vaccine to protect themselves from the risk of future pandemics.
Unfortunately, little real progress was made over the last year in developing that vaccine. The Pandemic Risk Insurance Act (H.R. 7011) copied a framework developed following the emergence of the terrorism risk. Proponents of PRIA seem surprisingly confident that an untested vaccine designed for one disease could simply be relabeled and used against another.
The Business Continuity Coalition, predominately representing the interests of the owners of captive insurance companies, supports relabeling the Terrorism Risk Insurance Act (TRIA) for pandemics but are also open to tweaks. Clinical trials of TRIA conducted by the Federal Insurance Office showed that up to 95% of program payouts would go to these secretive corporate-owned insurance companies. Under a pandemic version, PRIA would commit up to $750 billion for a “write your own corporate bailout” program. Those with access to sophisticated lawyers, accountants and insurance advisors have the potential to write themselves pandemic insurance covering executive bonuses, share buybacks, and dividend payouts nearly completely funded with government money. As an added perk, PRIA would free recipients of program benefits from inconvenient COVID-19-era restrictions on mass layoffs.
For its part, the insurance industry’s first principle in designing a financial vaccine was that insurers would not be on the hook for the cost. In the initial bid, in the form of the Business Continuity Protection Program, individual insurance companies would be allowed to decide whether to administer a federally developed and financed vaccine (for a suitable fee). Chubb’s Pandemic Business Interruption Program upped that offer by committing the industry to put as much as $30 billion of its own money on the line. The Business Continuity Protection Program countered by introducing the concept of an excess layer through which willing insurers could elect to commit some of their own capital. Zurich has floated a variation through which an insurer could cherry-pick when it would put its own money at risk.
Businesses, nonprofits, local governments, workers, and families put at risk by future pandemics could be forgiven for wondering what they – the supposed beneficiaries of these proposals – might expect to get from a federal insurance program and whether it would be enough.
The PRIA camp figures that so long as insurance companies make available insurance policies without pandemic exclusions, money would flow during a pandemic. Few main street policyholders should take comfort in this reasoning. The majority of court cases upholding insurance company denials of COVID-19 claims are not based on the virus exclusion but on the lack of any evidence of “direct physical loss of or damage to [property].” PRIA does nothing to address the property damage prerequisite found in nearly every small business and middle-market property policy. Under PRIA, small businesses would pay a premium for pandemic coverage – but if the next pandemic is anything like COVID-19 they would again be left empty-handed.
PRIA promises a much more rewarding experience for multinational corporations that can afford to set up their own personal insurance companies (“captives”), which may be why captive owners are the proposal’s most ardent supporters. A corporate parent and its insurance subsidiary (usually staffed by the same executives) could simply agree to remove any requirement for property damage in the policy. The captive would be free to pay its parent’s claimed losses, with the U.S. Treasury obligated to pick up 95% of the tab. As with the Terrorism Risk Insurance Program on which it is based, nearly all the government money under PRIA seems poised to flow uphill toward large corporate interests.
The insurance industry took its inspiration, as it were, on the nature and duration of the benefits to be paid to policyholders directly from the Paycheck Protection Program. These proposals envision a “parametric” or formula-based payout meant to cover payroll, rent, utilities, and mortgage interest expense for a period of three months following the issuance of a pandemic lockdown order. Stripping away its fancy wrapping, the insurance industry’s proposal is to sell the much-maligned Paycheck Protection Program benefit as an annual endorsement to commercial property insurance policies.
Breaking it down
The insurance industry should look to the pharmaceutical companies for insights into how they developed and rolled out effective COVID-19 vaccines in record time.
The only way to develop an effective financial vaccine against the risk of future pandemics is to ask the same three questions that led to the Moderna, Pfizer-BioNTech, and Johnson & Johnson vaccines:
What disease are we trying to prevent?
How can a vaccine combat this disease?
Who will administer shots into arms?
Even a cursory review of the myriad pandemic insurance proposals on offer reveals that the insurance industry started with the last question and has been struggling to work backward through the list.
Each of the proposals focuses exclusively on mitigating the direct financial impact on businesses and nonprofits ordered to shut down during a pandemic. While businesses shuttered by COVID-19 lockdown orders have suffered, so too have businesses that remained open or could have remained open. Many saw a dramatic fall-off in sales or experienced catastrophic supply chain disruptions. Further, some businesses stayed open but incurred significant expenses in reconfiguring operations, such as the many thousands of restaurants forced to convert from a dine-in to a carry-out-only model.
Business interruption is only one part of the pandemic insurance puzzle. COVID-19 has typically not required businesses to implement expensive decontamination procedures, so the proposals do not even mention coverage for decontamination expenses or loss of property unable to be cleaned. However, it is entirely possible the next pandemic may involve significant risk of transmission through surface contact.
Of course, pandemics are about people, not property. The existing proposals leave businesses, nonprofits, and local governments without any special tools to help manage the risk of pandemic-related workers’ compensation claims, products liability losses, or third-party negligence suits. That such losses have been limited – so far – during COVID-19 hardly suggests these exposures cannot rival or even surpass business interruption losses in future pandemics.
A business-interruption-only program may be exactly what policyholders need – or it may be part of a larger pandemic risk landscape that has yet to fully reveal itself because of the unique characteristics of the COVID-19 virus. Before the insurance industry takes its one shot at a federal pandemic risk program, it must be confident Congress is aiming at the right target.
Once the insurers have scoped the pandemic risks that must be addressed, they can turn their attention to designing a benefit structure that delivers the pandemic protections businesses, nonprofits, and local governments really need. For example, the insurance industry proposals envision business interruption coverage payouts would extend for only three months. Yet, more than a year into the COVID-19 pandemic many small businesses continue to struggle for survival. Three months seems a bit shy of meaningful from a policyholder’s perspective.
With a firm understanding of the pandemic risks their policyholders face and a realistic assessment of the nature and extent of benefits policyholders need to manage those risks, the insurance industry can return to thinking about how this new financial vaccine could be administered – and who will pay for it.
Jason Schupp is the founder and managing member of the Centers for Better Insurance (CBI), an independent, self-funded organization committed to optimizing the value the insurance industry delivers to all stakeholders (including policyholders, employees, shareholders, and society at large). CBI does so by making available unbiased analysis and insights about key regulatory issues facing the industry. Prior to founding CBI, Jason served for over two decades in various legal and regulatory roles, including Group Compliance Officer, with a Switzerland-based multinational insurance group. He is the author of The Terrorism Risk Insurance Act: Policy, Processes and Controls.