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BCPP Proposal: Summary, Key Risks

On May 21, the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA) and the Independent Insurance Agents & Brokers of America (Big “I”) released their proposal to address future pandemics: the Business Continuity Protection Program (BCPP).

The attached document summarizes this proposal and identifies several key risks to consider as this proposal is debated and compared with other concepts.

The Proposal

In a nutshell, insurance agents and brokers may elect to sell a FEMA-administered protection agreement to businesses and nonprofits. If a business purchased this protection and its industry was later ordered closed due to a pandemic, the business would receive an immediate payout of a previously determined amount. 

See also: PRIA: A Tale of 2 Policyholders  

The payout amount is a percentage (e.g., 80%) of three months of the business’s payroll and operating expenses as reported in its last tax returns filed prior to purchasing the protection agreement. At the time it buys the protection agreement, the business would promise to spend any payouts on retaining its employees and covering other business expenses.

Key Risks

The BCPP concept raises several risks to consider in this and any other proposal intended to compensate businesses during pandemic lockdowns.

  • Risk to State Role in Pandemic Response –The BCPP would require lockdown orders to either come from the federal government or follow an approach dictated by the federal government. In contrast, the states have taken responsibility to shape their own COVID-19 lockdown orders based on local needs and metrics subject to high-level guidance from the federal government.
  • Basis Risk – Because payouts under the BCPP are based on out-of-date financial metrics, businesses face a significant risk that payouts would not match their actual needs. Failing businesses would tend to get more than their current expenses while successful businesses would get less.
  • Moral Risk – The BCPP would pay out based on a business’s self-assigned NAICS industry classification code. Businesses could improve their chances of receiving a payout by selecting a higher-risk code before a pandemic or lobbying for the inclusion of their NAICS code in a lockdown order during a pandemic.
  • Regulatory Risk – Although state licensed insurance agents and brokers would sell the BCPP product, it is not an insurance contract. Accordingly, insurance agents and brokers would face the risk of having to obtain an appropriate license and implement additional training, processes and controls.

2 Key Tools for Innovation in P&C

Imagine this: two separate kingdoms, the kingdom of P&C insurers and the kingdom of agencies and brokers. Within each kingdom, each insurer and agency is represented by its own little house, and every little house has a door. Each door can open both ways and represents a way to communicate and share data – and these kingdoms need to share lots of data.

The only way to send data between houses is to build deep trenches. Building a trench is difficult, expensive and time-consuming. And the P&C insurer must dig the trench to each agent or broker, then knock on every agency’s and broker’s door to see if they will open it and allow data to be shared.

In the world I have described, insurers are very busy building these trenches to the agencies and brokers. Insurers spend a great deal of time, money and resources. Yet, when the insurers finally get to knocking on all the doors, they find that some agencies have their doors wide open and are ready; that some will open their doors eventually; but that others have no desire to ever open their doors.

What’s more, many insurers won’t fund the trench digging, so agencies may want a connection but are left without the trench.

For the kingdoms of the insurers and of the agents and brokers, the system is not built for success.

What I just described is reality. Insurers and agencies have to share data for policies, billing and claims. But the cost, risk and payback are deterrents. Even the will to communicate is not always there.

The formalities and costs to share data are what I described as trenches. Missing or incomplete “trenches” result in missed opportunities, inefficiencies, misinformation and misunderstandings. For example, what an insurer might view as a small book of business not worth investment might be a huge book for some agencies. Sometimes, the lack of understanding between the two “kingdoms” can be astounding.

Yet we continue to go down this path, just as we have for many, many years.

We have an opportunity to rethink our situation. Two key tools of innovation can bridge the gap between insurers and agents: ideation and crowd sourcing. These may sound like buzz words, but, by allowing varied groups to have a voice in solving challenges, ideation and crowd sourcing can allow decision makers to see data trends across segments of organizations. More importantly, ideation and crowd sourcing can offer solutions to challenges for little to no investment through the ideas of people who wouldn’t otherwise necessarily have “a seat at the table.”

We know what we hear from agents: that, as we described in the “two kingdoms,” sometimes there are agent houses with no trenches even being built to them. We also know that insurers sometimes find that, even after all the work of establishing trenches, some agents keep their doors closed. Utilizing innovation tools to communicate these pain points and search for a better method of business is a great step forward.

But what can insurers do right now to solve the challenge of the two kingdoms?

In the short term, insurers can demand that all leading vendors of agency management systems and policy administration, billing and claims management systems have adapters built in and ready for plug and play for all lines of business and transactions. This would improve implementation time, reduce investments and essentially remove the “closed doors” problem facing insurers.

In the long term, invest in ideation and crowd sourcing to redesign the connections between insurers and agencies. Listen to the pain points and notice trends. Crowd sourcing will offer powerful data to build a better system. Start posing questions to your own organization like, “How do we leverage the cloud and big data concept to rethink the 40-year-old point-to-point integrations?”

You’ll be surprised at the results and how meaningful making small changes can be. Let’s do it.