As the country watched COVID-19 travel from China throughout Europe and to the United States, it was obviously going to become an enormous issue. In order to contain the spread of the virus, governors started closing down schools and nonessential businesses in order to keep the hospitals from being overwhelmed. Once businesses closed and realized that they were losing income, they looked to their insurance policies for coverage for those losses.
Business interruption coverage, common to many commercial property policies, provides coverage when a covered peril causes the suspension of business operations or neighboring operations which causes civil authorities to shut down the insured's business. The problem is that a virus does not cause physical damage. Carriers immediately started explaining this to insureds as they tried to file claims. Some insurance departments issued bulletins to carriers requiring them to send notices to insureds explaining coverage, while other departments issued consumer bulletins explaining coverage and that interruption losses were likely not covered.
Like flood, earthquakes, and other catastrophic losses, pandemics are something that is virtually impossible to predict and rate for. Even if rates could be developed, like flood coverage, premiums would be so high as to be unaffordable for most insureds.
It wasn't long before state legislatures started trying to find ways to provide coverage. Some created bills that would override the policy language and force carriers to pay claims for coverage that did not exist on the policy, nor had any premiums been collected for. The bills also created an assessment of all carriers to reimburse carriers for these claims.
From the beginning, the industry knew this would be an enormous problem. Estimates are that losses would run $200-300 billion or more a month, something the industry is not prepared to handle.
On March 18, a list of proposed regulations included A Pandemic Risk Insurance Act (PRIA) which would create a reinsurance program similar to the Terrorism Risk Insurance act (TRIA) for pandemics and would cap the total insurance losses that insurance carriers would face. It was requested by the National Retail Federation.
Various members of Congress have sent letters to four property/casualty industry groups asking that carriers pay business interruption claims even though policies exclude such coverage. The industry groups naturally declined, explaining that policies were not designed to provide this coverage and that no premiums have been collected to cover such losses. The industry has researched the possibility of covering pandemics in the past; however models showed that it was not feasible due to the amount of premium needed to be charged in order to make it actuarially sound to provide the coverage. Insureds would not be able to afford the coverage if it was rated correctly. Unlike natural catastrophes that hit limited areas at a time, a pandemic can affect the entire country at once, and trying to provide coverage for the entire country is virtually impossible.
In response, industry groups have explained the position and that like terrorism, this is something the federal government should be handling. Various ideas are floating around. One is to develop a Pandemic Risk Insurance Act, which would operate similar to TRIA, which would mandate that carriers cover losses up to a certain amount when specific conditions are met. Once a specific dollar amount of paid losses was met the government would step in to cover the excess losses. This would work for future losses but does not address the current situation.
National Association of Mutual Insurance Companies (NAMIC) has joined with a group of industries to call for the creation of a COVID-19 Business and Employee Continuity and Recovery Fund. This would provide assistance directly to businesses impacted by COVID-19 and their employees, without forcing carriers to provide coverage not included in current policies. The fund would be funded by the federal government under the authority of a federal administrator. This administrator would have authority to enter into contracts with businesses to administer the Recovery Fund and facilitate distribution of funds to affected businesses and employees. The relief would help businesses retain and rehire employees, maintain benefits, and meet operating expense obligations.
Another idea is a revision of TRIA to include pandemics and associated perils with them, such as government enforced quarantines and border closings. Insureds who declined TRIA coverage would get a one-time opportunity to retroactively buy coverage at three times the originally quoted premiums; coverage would be backdated to include the current pandemic situation and current business interruption losses; the revised TRIA would serve as an organized backstop and pool for future losses for pandemics and associated perils. With two unrelated perils in a risk pool, it would be easier to provide relief for any given peril. If this was put in place a certified act of pandemic should be declared immediately triggering this coverage which would significantly relieve the pressure on businesses and boost the economy.
As the pandemic progresses, more ideas will be put forth with various ways to help businesses and protect the insurance industry. What eventually happens is important to the solvency of insurance and other businesses.
UPDATE – A discussion draft bill has been developed that would establish a Pandemic Risk Reinsurance Program. The stated purpose is to provide a system of shared public and private compensation for business interruption losses stemming from an outbreak of communicative diseases or pandemic, in order to protect consumers by addressing market disruptions and ensure continued availability of business interruption coverage for such losses and allow for a transitional period for the private market to stabilize, resume pricing of such insurance and build capacity to absorb future losses while preserving state insurance regulations and consumer protections.
The draft presents a number of definitions and discusses the establishment of the Pandemic Risk Insurance Program, where participation is voluntary and the Secretary of the Treasury shall develop a process by which insurers may elect to participate in the program by calendar year. The insurers will be charged a premium for reinsurance based on the actuarial cost of said reinsurance, including administration costs of the program. Conditions for payment are outlined, and participating insurers will make business interruption coverage available for losses that fit the parameters under public health emergencies. Participating insurers will pay the claims and submit a claim for payment of the Federal share of payment for losses under the program with written certification of the underlying claim and of all payments made for insured losses, and certification of its compliance with provisions of this subsection of the Act.
Business interruption coverage provided under this act is to be the same as business interruption coverage provided for other events.
Provisions will be developed for residual market entities and workers compensation funds. A cap is set on annual liability of $500,000,000,000 during a calendar year. Insured losses shall be shared pro rata by each participating insurer that incurs losses that do not exceed the deductible combined with its share of losses.
The trigger for the program is when the aggregate industry losses resulting from a public health emergency exceeds $250,000,000.
The full text of the draft can be found here: Pandemic Risk Reinsurance Program Draft.