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.
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.
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- Basis Risk – Because payouts under the BCPP are based on out-of-date financial metrics, businesses face a significant risk that payouts would not match their actual needs.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.