Pandemic Backstops Face Uphill Battle Amid COVID-19 Crisis UPDATED 7/23/21 3:00P.M.
The insurance industry wants a government-assisted business interruption gap fix before the next pandemic hits.
- Frank Klimko
- August 2021
Industry-sponsored proposals for creating government pandemic backstops to fix the business-interruption protection gap have been received coolly by policymakers and lawmakers, whose attention is concentrated on managing the current crisis rather than preparing for the next one, according to observers.
[UPDATE: Insurers could not agree whether lawmakers should create a government backstopped pandemic insurance program during a U.S. Senate insurance subcommittee hearing on July 22.]
As the COVID-19 virus emerged last year and upended the global economy, industry groups from around the world eagerly proposed a wave of partnership programs to create publicly funded backstop efforts. Although too late for the current pandemic, industry groups noted a palpable sense of urgency to develop a government-assisted BI gap fix before the next one.
For most of the last half of 2020, public-private partnerships were tendered worldwide, in the United States, the United Kingdom, France, Germany and Switzerland. Most entailed some sort of government buy-in and provisions that would make parts or all of the cover mandatory.
- A bill in the U.S. Congress that would cover most additional losses.
- A U.S. industry proposal that would cover benefits and expenses for three months.
- A Zurich North America “concept” permitting insurers to cede 100% of the risk back to the federal government.
- A Chubb North America option, the Pandemic Business Interruption Program, includes a $750 billion program for small businesses that provides an immediate cash infusion when a pandemic is declared.
- A German proposal allowing capital to be accumulated two different ways.
- A French exceptional catastrophes program that would extend beyond BI losses.
- Lloyd's three different programs to tackle future pandemic losses.
None has moved, undermined by what observers say is a confluence of poor timing—because governments are still preoccupied by the existing crisis—and the lack of political will to force a new assessment on businesses still struggling to recover from COVID-19.
“The costs and benefits of insurance coverage mechanisms, which would require large financing from member states, and possibly even a direct role from the European Union, should be evaluated very carefully,” said John Berrigan, director general, European Commission. Policymakers also must consider an “evaluation possibly of the insurance sector itself to participate in such partnerships.”
Peter Caminiti, vice president and property technical director for Zurich North America, said the world governments' overarching sense of caution is well deserved. “It's really about to make sure we get it right. And, I think we are moving at a speed appropriate for us to learn,” he said. “Again, it's not over.
“We are in a much better place here in the U.S. than we were four months ago, but there are many around the world that are right in the throes,” he said. “The next pandemic may look nothing like this pandemic. So we need to make sure that we don't have a bias (based on current events) as we think about the solutions.”
Last year, the company offered a “concept” based on the Federal Crop Insurance Program. Insurers could cede 100% of the risk back to the federal government, while others could keep a portion of the risk as they got comfortable with the program. The plan would be a dynamic one, changing with the demands of the marketplace and would include some sort of mandatory participation.
Jerome Haegeli, group chief economist at Swiss Re, said it's important to recognize the dynamics of the COVID-19 pandemic and realize it will happen again. “COVID-19 was not a Black Swan event. It was due to happen, as it happened in the past. The long-term global economic environment is a very uncertain one,” Haegeli said.
For a pandemic shock, where governments order shutdowns, there's no way the insurance industry alone can absorb the shock of an uninsurable event, he said.
“The U.S. P&C industry as a whole has about $850 billion in capital,” Haegeli said. “If you look at the revenues of U.S. small businesses, their revenue is $400 billion a month. There is no way the insurance industry can (indemnify) without public sector support.”
In the United States, some lawmakers coalesced around H.R. 7011, the Pandemic Risk Insurance Act of 2020 that was introduced by U.S. Rep. Carolyn Maloney, D-N.Y. It would create the Pandemic Risk Reinsurance Program.
The program would cover 95% of additional losses up to $500 billion in a single year, with the remaining 5% spread among insurers. There is a $750 billion cap on federal compensation. Any losses above $750 billion would be the responsibility of private carriers. The bill has not received a vote in the House.
Sen. Kyrsten Sinema, D-Ariz., recently unveiled a bipartisan pandemic risk working group in the Senate. But there is no word whether the group supports Maloney's bill or something else.
U.S. insurance industry representatives advocated for their alternative proposal, the Business Continuity Protection Program. The BCPP would provide business revenue-replacement assistance that would reimburse up to 80% of payroll, benefits and expenses for three months. It would be managed by the Federal Emergency Management Agency. It is not an insurance product.
A Chubb North America option—the Pandemic Business Interruption Program—also has not been implemented. It includes a $750 billion program for small businesses that provides an immediate cash infusion when a pandemic is declared, and a separate voluntary $400 billion program for medium and large businesses, with losses paid through the industry's traditional claims-adjudication process.
Public-Private Partnerships Around the World
A German Insurance Association working group last year developed a public-private model that would mitigate future economic losses from a pandemic. The association examined two possible models. One would build up capital via flat-rate levies and a second with a sliding scale of participation. Limited progress has been made in getting the government to move on either German model, the GIA said.
The association hopes things will pick up later this year after national elections in the fall.
French insurers worked to create a new program for exceptional catastrophes, CATEX (which is unrelated to the U.S. platform by the same name). Under the proposed scheme, insurers would provide €2 billion (US$2.38 billion) of coverage per year for small businesses obligated to close due to government mandate, with the government stepping in beyond that via state reinsurer CCR. The program is not limited to pandemic shutdowns.
The coverage would be built into either fire coverage, which is mandated for businesses, or business interruption coverage.
However, Bruno Le Maire, French Minister of Economy, Finance and Recovery, in December said he would not move forward with CATEX out of fear of further disrupting already stressed-out small and medium-sized businesses with new insurance charges.
Convex Chief Executive Stephen Catlin last year called on the insurance community to be proactive in finding a long-term solution to pandemic losses that has become known as Pandemic Re. It was designed to develop a public-private partnership solution for pandemic losses. Catlin said the effort would be a natural follow-up to Pool Re, the U.K.'s terrorist pool. After initial organizing and meetings, there have been no new developments for the program, Catlin's office said.
And James Dalton, Association of British Insurers director of general insurance policy, confirmed a U.K. pandemic risk solution would have to wait.
“The message across all jurisdictions appears to be the same—governments are not yet ready to discuss managing the risks associated with a future pandemic given that so much energy, money and intellectual capital is being directed toward the ongoing fight against COVID-19,” Dalton said. Lloyd's also has sought to address such risks. Last year, it announced three insurance and reinsurance frameworks—called ReStart, Recover Re and Black Swan Re—to tackle future pandemic losses and other catastrophic events. Recover Re and Black Swan Re require partnership between the insurance industry and government.
Discussions about the programs are ongoing, a Lloyd's spokesperson said.
There are some in the industry who argue against the public-private partnerships, said Kai-Uwe Schanz, deputy managing director and head of research and foresight at the Geneva Association.
“The loss potential is incalculable,” Schanz said. “There are also views in the industry where people say it 'doesn't make sense.'”
The industry also worries such a partnership can create something called a “charity hazard,” said Mark J. Browne, professor and faculty chair of risk management, insurance and actuarial science at St. John's University. Insurers are concerned such efforts dampen demand by fueling the perception that governments will intervene and provide disaster assistance in the event of a truly disastrous pandemic.
“If you expect somebody else to care about the risk, you are less inclined to deal with it yourself,” Browne said.
Jeffrey Alpaugh, managing director and U.S. and Canada growth and industry leader for Marsh McLennan, rejected that argument.
“It's the lack of a public-private insurance program that actually creates the expectation that the government will intervene and provide support to individuals and businesses, and therefore insurance is not needed,” he said. “Public-private partnerships have proven to build resilience into the economy.
“There are certain risks that require the full weight of the U.S. government to manage in partnership with the insurance industry. Pandemic risk is one of them,” Alpaugh said.
Oliver Bäte, Allianz SE chairman, expressed concern as insurers adjust to a post-pandemic world. “Our society's fragility is not going to go away,” he said. “Our traditional product design principles have been really tested.”
Insurers need to “be a little smarter and do the fire drills before the fires actually happen,” Bäte said.