The Dilemma of Insuring Virus Claims

There was a consensus that the events were not predictable, at least in terms of consequences or severity; in fact, some modeling of an aircraft hitting buildings in large cities had been done. What had not been done was modeling that included assumptions closer to the actual facts of 9/11 such as the use of hijacked commercial airliners, the use of three airliners in one "event"; the possibility that one skyscraper, let alone two, could be completely demolished; the death of nearly 3,000 innocent people and 6,000 other injuries in three locations; and the global economic impact of the event. The consensus among practitioners was that it was a black swan event and, thus, not predictable from either a probability or severity standpoint.

Because of this consensus, the insurance industry aggressively pursued federal government engagement in financial protection for the industry and its interest in continuing to provide some form of terrorism insurance for business and consumers. The federal government was equally motivated and wanted to ensure the insurance industry could continue its key role of facilitating global economic efficiency and trade without undue concern for unmanageable potential loss exposure.

Thus was born the Terrorism Risk Insurance Act of 2002 (TRIA). TRIA has been reauthorized numerous times, most recently on December 31, 2019, for another 7 years. And yet, no loss has ever been paid from this Treasury-backed government "reinsurance" mechanism. On its face, that sounds bad, but arguably, its mere existence has provided assurance to buyers and sellers alike that terrorism, whether nuclear, biological, or chemical in form, will not be allowed to disrupt domestic or global economic activity involving US companies. A few other nations have legislated similar mechanisms for similar reasons but with more limited affect.

The Case of COVID-19

Now, consider and contrast the events of September 11, 2001, with the COVID-19 pandemic that hit the United States in early 2020. The consequences of COVID-19 have been widespread and devastating to domestic and global economies around the world. The coronavirus has upended businesses of all sizes, including both public and private organizations. And it has ransacked activities across the full spectrum of human daily activities, including education, health care, employment, entertainment, and travel.

Was COVID-19 predictable? Are resulting losses insurable? Is COVID-19 a black swan event? These are all good questions, with a variety of answers depending on who you ask. From my point of view: no, no, and yes. But that's just me. More to the point, this was our 2020 9/11 event, with similar characteristics but even more wide-ranging implications.

More predictably, a legislator and several industry organizations are proposing both insurance and noninsurance solutions for the financial exposure mitigation to businesses by the effects of variously defined events as "pandemics," "viral emergencies," "public health emergency … due to viral infection," "outbreak of infectious disease or pandemic," and "state-ordered business closures." Among them are a wide variety of triggers with a high degree of overlap or commonality. Most of these proposals don't attempt to address the occupational disease debate/exposure that has led 21 states to require workers compensation policies to cover selected job types or classifications through governor-issued executive orders, legislative remedies, and revised administrative rules affecting the statutorily defined treatment of "occupational disease."

Apparently, this isn't viewed as significant in impact as business disruption and its attendant revenue affects, though actuaries in both California and New York have projected a range of cost impacts on the workers compensation system that is easily significant, if not catastrophic.

Insurance and Noninsurance Options

The solution proposed by Rep. Carolyn Maloney (D-NY) is getting the most attention, likely because it has been labeled the Pandemic Risk Insurance Act (PRIA) and reflects many characteristics like TRIA, introduced in 2002. Unlike TRIA, PRIA is exclusively focused on business interruption and leverages normal market participants who write this coverage on a primary basis, but typically with exclusions for virus or pandemic-related exposures—and that's the rub. Businesses have suffered massive revenue losses from COVID-19, and many continue to do so. But, in most cases, there is no insurer agreeing that their business interruption insurance policies cover or were intended to cover these risks.

While we can likely agree that not everything is insurable and that predictability is a central tenant of insurance, it would seem obvious that the effects of a pandemic would likely fall into this bucket. Unlike TRIA and terrorism, pandemic exposures were never intended to be covered by business interruption policies for this and other reasons. Other relevant exposure characteristics that suggest insurance is not a workable solution include the following.

• The widespread, worldwide effect on most countries
• The sheer number of infected persons
• The broad effect on nearly all segments of society
• The difficulty in devising an equitable premium that would be both affordable and with coverage benefits meaningful to buyers

So, the initial version of the PRIA solution includes other key characteristics that include the following.

• Applicable coverage line: business interruption insurance
  • Includes event cancelation
• A minimum of $250 million in total insured losses
  • 100 percent insured by primary markets within the first $250 million
  • Deductible of 5 percent of prior-year direct earned premium
  • 5 percent coshare of losses above the deductible
• Aggregate annual limit of $750 billion
• Voluntary insurer participation
• Broad eligibility among beneficiaries
• Program trigger: outbreak of infectious disease or pandemic
• Covers all claims during which time a public health emergency is in effect
• Estimated annual exposure of $47.5 billion
• Sunset in 7 years
• Administered and reinsured by the US Treasury
• Rates determined by insurers subject to state regulator rate and form approval
• Sold through traditional insurance channels
• Subject to a typical claims adjudication process

This is just the first iteration of the PRIA option that was met with "skepticism" by members of Congress during the first hearing in late November 2020 in the US House Committee on Financial Services. Several witnesses asserted that this exposure is not insurable and, as a result, were more supportive of one or more of the noninsurance solutions. Those alternative approaches include the following.

• The Business Continuity Protection Program supported by the American Property Casualty Insurance Association and National Association of Mutual Insurance Companies
• The Business Continuity Coalition's policyholder draft recommendations
• Chubb's Business Expense Insurance Program
• Zurich's draft concept mirroring the Federal Crop Insurance Program

Listen to the webcast of the hearing for details on each of these options.

These alternatives follow a similar pattern of focusing almost exclusively on the business interruption exposure. They run from a "reimbursement" mechanism sponsored by numerous industries most heavily impacted by COVID-19 to the use of multiple pooling mechanisms with intersections with some elements of more typically primary insurance. Their designs betray their sponsorship coming on the one hand from groups of businesses to top-tier property and casualty insurers whose interests are in containing maximum loss while having some chance at making a profit. Both motives were achieved in TRIA's several variations and allowing the regular market to reenter and expand terrorism offerings in concert with heavy post-9/11 take-up rates. Those take-up rates have since subsided a bit as the exposure evolved to be perceived as less likely or relevant catastrophic to many organizations with lesser effects from 9/11.

Conclusion

As the dialogue on developing these and other solutions continues, there is already an expected recognition of the need for businesses and organizations to get engaged in risk mitigation strategies that will provide some assurance to solution providers that risk transfer is not the only goal. In fact, for this exposure, keeping people as safe as reasonably possible stands right beside the interest in loss predictability and transferring only the truly catastrophic aspect of the exposure. I suspect that the COVID-19 crisis will need to play itself out before material progress is made on any of these proposed solutions. Meanwhile, organizations should assume these risks will continue to be largely uninsured and invest appropriately in loss prevention and claims management activities.

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General References/Sources

Primary

1. Claire Wilkinson, "Mitigation Incentives Critical to Pandemic Backstop: Panel," Business Insurance, December 9, 2020.
2. "Compendium of US State Insurance Department Responses to the COVID-19 Pandemic," Sidley Austin, LLP, December 12, 2020.
3. Financial Services Committee Hearing on Pandemic Risk Financing Solutions, US House of Representatives, November 19, 2020.
4. "NAIC Letter to the US House of Representative on 'Pandemic Challenges and Solutions for Policyholders and Insurers,'" National Association of Insurance Commissioners (NAIC), November 18, 2020.

Other Sources

1. Katie Kilkenny, "House Committee Interrogates Pandemic Risk Insurance Proposals as Industry Groups Urge Swift Action," Hollywood Reporter, November 19, 2020.
2. "H.R.7011—Pandemic Risk Insurance Act of 2020," US House or Representatives, 116th Congress, May 26, 2020.
3. Heather Turner, "Insurance groups unveil the Business Continuity Protection Program," NU Property Casualty 360⁰, May 22, 2020.
4. "Terrorism Risk Insurance Program," US Department of the Treasury, accessed on January 11, 2021.
5. "Pandemics," NAIC, November 19, 2020.
6. "Letter to the Subcommittee on Housing, Community Development, and Insurance Committee on Financial Services, US House of Representatives," NAIC, November 18, 2020.
7. "Compendium of US State Insurance Department Responses to the COVID-19 Pandemic," Sidley Austin, LLP, January 6, 2021.