Congress is assessing whether insurers and government together can “bend pandemic risk curves” for future events or simply replace some of the economic losses of businesses, putting them “in induced comas” during pandemics.
This was the essence of a debate at a virtual congressional hearing – “Insuring against a pandemic: challenges and solutions for policyholders and insurers” – convened to discuss the role of the insurance industry. insurance and the federal government in covering pandemic-related losses of small businesses for future pandemics.
At the hearing, which took place five months later than originally scheduled, participants also debated whether it was too early to come up with solutions.
John Doyle, president and CEO of insurance broker Marsh, has spoken out in favor of swift action and in favor of risk-based programs that encourage risk mitigation for future events.
“Although some have suggested that Congress delay until the end of the current pandemic, we believe there are compelling reasons to act now,” he said, referring to the law on l Pandemic Risk Insurance (HR 7011), a federal government reinsurance net inspired by the Terrorism Risk Insurance Act (TRIA) and sponsored by Representative Carolyn Maloney, (D-NY).
While others have pointed out the flaws in the PRIA, including the voluntary nature of the plan which would impact underwriting rates, insurer participation and affordability, Doyle focused on the need for incentives. in terms of speed and risk.
“If we start now, with time and the right solution, we can bend the risk curve for future pandemics,” he said. “Insurance creates the right economic incentives to drive change in society. Acting quickly will help us harness risk management and build a more resilient US economy, ”he said.
“Acting now will provide financial protection against future pandemics, in part, by absorbing some of the initial financial shock of the pandemic,” he added.
Doyle said acting now “will accelerate economic recovery by reducing uncertainty. Going forward, he hypothesized that “financial markets will seek assurance that companies are protected against a possible pandemic risk.” This means that “the pace of the recovery will depend on the nature and degree of confidence in the market,” he said.
But a conservative think tank leader urged Congress to take it slow because there are still lessons to be learned from the current pandemic.
“Don’t legislate for the next pandemic when we are in the midst of the current pandemic. Ad hoc solutions could be as good as it gets. Get help for the businesses, workers and communities that need it now, ”said RJ Lehmann, senior researcher at the International Center for Law and Economics and co-founder of the R Street Institute.
Lehmann consulted with insurance trade groups on an income replacement assistance plan known as the Business Continuity Protection Program (BCPP). This plan is promoted by the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, and the Independent Insurance Agents & Brokers of America.
Lehmann illustrated his point by noting that one aspect of the plan he suggested didn’t seem reasonable six months later. “A three-month benefit cap was my idea in April. It seemed generous. It doesn’t look like that now, ”he said.
Likewise, he noted that PRIA was originally drafted as a $ 500 billion program. “It’s now a $ 750 billion program. Not only is this clearly not enough, but given that it’s structured like a pot of money if it was in place during COVID, everything would have been eaten by New York City before it got to the second or second. third wave, ”he said. .
Lehman also took issue with the idea of a risk-based program. “The best argument for a public-private partnership is that insurers can help policyholders mitigate risk. But it is important to ask to mitigate the risk of what? ” he said. “It’s not the risk that a business is dangerous,” he said, comparing lines of business interruption and liability insurance where pricing signals can help mitigate risk. .
On the liability side, the risk to be reduced is the risk of a business closing. But in the event of a pandemic, the government wants businesses to close. “We want them to have a safety net so that they can shut down and survive and not lobby to lift the lockdown orders – because that’s how you get the situation where the schools are closed but the bars are closed. and the gyms are open, ”Lehmann said.
“Speaking as someone who has long preached the gospel of risk-based insurance, I tell you that you don’t want this to be a risk-based program. A risk-based program would mean that tech companies that can work remotely would pay the least, but restaurants, theaters and churches would pay the most. I don’t think this is the result you want, ”he said.
Lehmann also noted that while the BCPP specifies that the money distributed can only be used for things such as payroll and rent, “that is not how business interruption. [insurance] generally works. A company can have a request for an interruption and at the same time lay off all its employees, ”he said.
A lawmaker asked how typical this scenario is – having a company file a BI claim and then lay off staff.
“It wouldn’t be unusual. [It’s] will depend on the contract between the insurer and the insured, ”said Lehmann, noting that the insurance contract could specify that it insures the payroll. “The government is not involved in this process. And PRIA is not proposing anything that would prevent this from happening.
He said what is important are the relationships between employers and employees, companies and customers.
“The whole goal of PPP was to put all these companies in an induced coma, so that we could fight the virus, [and] then bring them back and hope everything gets back to normal, ”he said, referring to the COVID-19 relief loans from the federal government’s payment protection program.
Maloney noted that programs like PRIA and the one offered by Chubb, which combines a risk-based program for large businesses and a BCPP-like program for small businesses, are premised on the idea that the risk of a pandemic is insurable with appropriate federal support.
Still, she added, some speakers said the risk of a pandemic was absolutely uninsurable.
A pandemic makes the economic consequences of a pandemic “too severe and beyond the risk-taking capacity of insurers to bear,” Doyle said.
Bot Doyle added that Marsh agreed with Chubb CEO Evan Greenberg that the industry still has a big role to play. “With all due respect, shutting down businesses or putting businesses in a coma is not an ideal future state. We should be looking to change the outcome of the next pandemic, ”Doyle said.
Maloney referred to remarks attributed to Chubb’s Greenberg, saying that “the industry has a lot to take risks here” and that it is “a mistake on the part of insurers to think that they could not insure this at all. risk”.
The task fell to Michelle McLaughlin, underwriting director, Small Business & Commercial Middle Market for Chubb, to explain.
“Chubb believes it is very important for the industry to participate in the solution by playing a risk-bearing role, as the knowledge and experience of the industry can help foster better behaviors,” said McLaughlin. “We really believe the industry needs to polish the game here. Our involvement in a public-private partnership with the federal government would lead to a better understanding of pandemic risk and encourage improved risk mitigation and preparedness, ”she said, adding that a program that ‘Commits the capital of the insurance industry also provides an opportunity for increased risk. -sharing over time as direct and secondary markets develop, ”thus reducing the government’s future financial burden.
Request for coverage
Questions have been raised about the applicability to pandemics of a federal program like the Terrorism Risk Insurance Act, enacted some time after September 11, when lenders reacted to carriers putting terrorism exclusions on their policies.
Lehman contradicted Doyle’s assertion that financial markets will seek assurance that companies are protected against the potential risk of a pandemic in the future. “That’s not the situation here,” said Lehmann. “I don’t imagine that lenders will ask for an insurance product that doesn’t exist.”
Some lawmakers have attempted to fix insurance officials on estimates of the losses due to a pandemic and the levels of premiums that would be charged under various proposals compared to the levels of business interruption premiums today.
Industry representatives offered no guesses.
“It’s difficult for me to assess proposals to cover future pandemics when no one knows what those premiums might be,” said Rep. Cindy Axne, D-Iowa.
Rep. Trey Hollingsworth, (R-Ind.), Threw cold water on the ideas put forward and even had a subcommittee hearing. Looking to the future, he speculated that even with a program in place, Congress will not give clawbacks only to businesses that contribute to a program, leaving neighboring businesses in pain that have not paid in the. cold.
“The inclination of future conventions will be to pay everyone, to give everyone a recovery to help stimulate the economy. And then no one buys that insurance on the next round, because they recognize that everyone received the same payment whether they contributed to the program or not. “
“So I think this whole audience is about a lot of bad ideas that are masked under good economic policy, masked under insurance but [they] either aren’t, ”Hollingworth said.
This is an edited version of an original Wells Media Carrier Management article: Rapid Action and Comas: Talking Points During the Pandemic Relief Hearing.