Advisen

Insurance industry advises wait-and-see approach to federal pandemic-risk backstop

By Erin Ayers, Advisen

As support for a pandemic risk reinsurance backstop has grown among brokers, risk managers, and lawmakers, insurance trade groups have expressed reluctance for a mechanism based on existing federal programs like the Terrorism Risk Insurance Act or the National Flood Insurance Program.

Existing proposals for a backstop envision sharing the financial risk of future pandemics, usually with a trigger of $250 million in industry losses and an annual aggregate cap of $500 billion. Support for such a program has come from Marsh, RIMS, and the American Academy of Actuaries, which last week sent a letter to the federal lawmakers saying that pandemic risk represents a “catastrophic” risk like those handled by TRIA and NFIP.

“From an actuarial perspective, pricing the potentially infrequent but high, widespread costs of pandemic risk into premiums as they would typically be calculated in the commercial market could raise affordability and other issues that programs like Terrorism Risk Insurance Program and National Flood Insurance Program are specifically designed to address,” said Lisa Slotznick, vice president of casualty for the Academy in the letter to the U.S. House Financial Services Committee.

However, insurer trade groups have been largely quiet on the topic of a Pandemic Risk Insurance Act, or PRIA, instead supporting federal relief programs like the CARES Act and lobbying against legislative efforts to nullify virus exclusions in business interruption policies.

The American Property Casualty Insurers Association (APCIA) has said that insuring against pandemic risk is a task solely for the federal government and while vowing to work with the federal government on solutions, has not opined publicly on a backstop.

According to Jimi Grande, senior vice president of government affairs for the National Association of Mutual Insurance Companies (NAMIC), talks of a pandemic backstop are premature and insurers have focused on dealing with the COVID-19 outbreak rather than looking to the future.

“We don’t need to be rushing into long-term solutions until we have a full understanding of the current crisis,” Grande told Advisen. While it makes sense that lawmakers would look to the structure of existing programs, there are “fundamental differences” between pandemic risk and all other risks, he said.

“It has to have some underlying characteristics to make it insurable,” Grande said. While the severity of a terrorist attack can be modeled, pandemic represents a much more unwieldy risk. The 9/11 attacks resulted in 3,000 claims, isolated for the most part to a small geographic area. The losses due to the pandemic have been varied, widespread, and unprecedented.

For comparison to the PRIA proposals, TRIA originally had a trigger of $5 million and has since expanded to $200 million for qualifying events with a $100 billion annual aggregate cap. Under the program, which was introduced in 2002, P/C insurers must make terrorism coverage available on commercial policies. To date, no event has been certified as a terrorist attack and the take-up rate for terrorism coverage in May 2019 was about 62%, according to Marsh, with education, media, finance, and real estate the top industries buying the cover.

TRIA was not passed immediately following the Sept. 11 attacks, Grande noted. It took until November 2002, over a year later, to establish the program. It also stabilized an existing private terrorism insurance market. No equivalent market exists for pandemic risk, he said.

“While it might be convenient to have the private insurance market be able to take on every risk, the widespread nature makes it super clear it’s not going to be possible,” Grande said. “It’s like having Hurricane Katrina happen everywhere to everyone in the world for a sustained time.”

Editor Erin Ayers can be reached at eayers@advisen.com