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Pandemic Risk Insurance Act - Make Available
- 1. © Centers for Better Insurance, LLC 2020 Version 1.0 Centers for Better Insurance (CBI) is an independent organization focused on supporting the insurance industry to optimize the value it delivers to all stakeholders (including policyholders, employees and society at large). CBI does so by making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators and policymakers. THE MATERIAL AS WELL AS ANY OTHER INFORMATION PROVIDED BY CBI IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS. CBI does not guarantee the accuracy or completeness of this material or any other information and may add, remove, discontinue, change, improve, or update this material or any other information without notice. Under no circumstances shall CBI be liable for any loss, damage, liability or expense claimed to result from use of this material or any other information. Centers for Better Insurance Policyholders Employees Shareholders Society Supporting value creation for all stakeholders through beneficial purpose, sound governance and effective controls www.betterins.org What would be “made available”? And to whom? Pandemic Risk Insurance Act CBI CBI-PAN-20-12
- 2. © Centers for Better Insurance, LLC 2020 Version 1.0 2www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society PRIA and Property Damage Executive Summary While most analysis of the Pandemic Risk Insurance Act (PRIA) has focused on how the insurance industry and federal government would divide up the risk of future pandemics, little has been said about what policyholders stand to gain or lose. Based on the April 7 discussion draft, PRIA is shaping up to be a Tale of Two Policyholders and it is not hard to figure out which one would get the short end of the stick. Regular Policyholders Large Corporations Small businesses, mid-sized businesses, churches, school districts and other nonprofits and local governments would depend on traditional insurance companies to offer: • Standard insurance policies; and • Pricing based on risk and market forces. These standard policies now typically come with virus or pandemic exclusions. PRIA would require participating insurers to offer business interruption coverage without such exclusions. That is great as far as it goes, but it does not go very far for these policyholders. Standard business interruption coverage will only pay out if the business is interrupted because of property damage. PRIA does nothing to address that obstacle to coverage. An obstacle it is. Policyholders have resorted to litigation and state legislation hoping for a declaration COVID-19 is a property damage phenomenon causing their businesses to shut down. The same legal gyrations would be necessary for a regular policyholder to tap into the pandemic coverage promised by PRIA. PRIA grants large corporations a much smoother path to business interruption payouts. The proposal invites businesses with enough money and sophistication to dispense with traditional insurers offering standard policies. Instead, large corporations can simply write their own insurance policies. Just as with the Terrorism Risk Insurance Act, a large corporation can form a subsidiary in Vermont, Delaware or one of several other friendly jurisdictions to serve as the company’s personal insurance company - known as a captive. By owning its own insurance company, a large corporation can design and set the price for a bespoke multi-billion-dollar pandemic bailout free of any restrictions on its flexibility to: • Pay executive bonuses; • Declare shareholder dividends; • Buyback its own shares; and • Lay off employees. More than 500 have written their own terrorism insurance policies under TRIA without any oversight from U.S. Treasury and little permitted transparency from State insurance commissioners. There is every reason to expect the same here.
- 3. © Centers for Better Insurance, LLC 2020 Version 1.0 3www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society PRIA and Property Damage Overview of the Proposed Program Insurer Co-Share 5% Federal Share 95% of insured losses above the insurer deductible Insurer Deductible 5% of insurer’s prior year direct earned premium for covered lines $500 billion cap on aggregate Insurer Share and Federal Share The Federal Backstop The Make Available Requirement The Pandemic Risk Insurance Act replicates the basic quid pro quo of the Terrorism Risk Insurance Act. The federal government promises to reimburse a large portion of an insurer’s business interruption coverage payouts from a pandemic. In exchange the insurer agrees to offer policies that do not specifically exclude pandemics from business interruption coverage. PRIA would establish a federal backstop based on the Terrorism Risk Insurance Program. Under the backstop, the federal government “reinsures” a percentage of covered losses paid by the insurance company above the insurance company’s deductible. Both the federal and insurer shares are subject to an overall program cap. A participating insurance company must offer business interruption coverage for pandemics on the same terms, limits and conditions applicable to business interruption coverage for any other event. Under a standard policy “make available” would be satisfied by offering a policy without a pandemic, virus or similar specific exclusion.
- 4. © Centers for Better Insurance, LLC 2020 Version 1.0 4www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society PRIA and Property Damage Regular Policyholders: Property Damage Required Coverage sold to a regular policyholder only covers business interruption when there has been “direct physical loss or damage” to property. Moreover, that property damage must be the cause of the business interruption. PRIA’s “make available” requirement does not change this prerequisite to coverage because property damage is a condition for all business interruption claims not just pandemic claims. Standard property insurance policies designed for small and mid-sized businesses require damage to property that causes either: • The business to suspend its operations at the insured premises; or • A governmental authority to issue an order prohibiting access to the insured premises. Property damage “in the air” is insufficient. The property damage must be the cause of the business interruption for coverage to apply.
- 5. © Centers for Better Insurance, LLC 2020 Version 1.0 5www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society PRIA and Property Damage COVID-19 Litigation and Legislation Tries to Find “Property Damage” COVID-19 litigation and efforts within state legislatures aimed at triggering business interruption coverage seek to establish that the virus causes “property damage.” Without property damage, there can be no coverage. The same dynamics would play out even if PRIA becomes law: Small and medium-sized businesses would still need to establish property damage had caused the interruption of their businesses. Pennsylvania Senate Bill 1127 Oceana Grill v. Lloyds (Orleans Parish, Louisiana) 837 Foothill Blvd v. Travelers (LA County, California) Litigation Legislation Request for a judicial declaration that COVID-19 causes property damage Request for a vote that COVID-19 causes property damage
- 6. © Centers for Better Insurance, LLC 2020 Version 1.0 6www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society PRIA and Property Damage Insurance Captives: No Need for a Look for Property Damage Under PRIA large corporations have the privilege to write their own pandemic insurance policies just as they write their own terrorism insurance policies under TRIA. As we have seen with TRIA, large corporations would issue to themselves pandemic business interruption policies with large limits, exotic coverages and low premiums - while regular policyholders ultimately foot the cost of the program. Corporate Parent Operating Subsidiary Captive Insurance Company Captives under TRIA A captive is an insurance company owned by its policyholder. This subsidiary negotiates the terms of coverage with its parent, determines how much premium to charge its parent and decides whether its parent’s claims should be paid. Typically, the parent’s key executives sit on the board of the captive. According to Treasury’s most recent report on TRIA, captive owners are key beneficiaries of the program: • At least 500 captives participate in the program; • Captives account for 23% of the all US terrorism premiums but only 4% of other property and casualty premium; and • Captives would receive about 95% of all backstop recoveries under a hypothetical truck bomb attack in Chicago. Captives under PRIA Under PRIA, a large corporation could negotiate with its captive subsidiary for coverage of business interruption loss from a pandemic: • Without a requirement for the corporate parent to establish- o Any property damage from the pandemic; or o Any relationship between property damage and the interruption of business • With multi-billion-dollar limits of coverage at little cost- o $1 million premium results in a $50,000 deductible o $2 billion of coverage would require the captive to line up only $100 million of risk financing • Free from the attachment of any federal strings on its bailout, the large corporation would suffer no restraint on: o Executive compensation; o Shareholder dividends; o Share buybacks; or o Layoffs. Regular policyholders who must depend on the free market to define coverages and pricing for pandemic coverage would enjoy none of these corporate perks. As taxpayers, though, they would be left with the bill for the generosity of their larger competitors.