Tag Archives: coronavirus

COVID and the Need for Devil’s Advocates

Over the weekend, two articles made a compelling case that we need to better vet academic studies before they become set in the public consciousness on controversial topics like possible systemic racism and the coronavirus. Both recommended a solution that has been a focus of my career — devil’s advocates — and that we all should use as we formulate personal and corporate strategies in these turbulent times.

Let’s spend a minute on why they’re so important and how you can use them — rather easily, in fact.

The article related to the coronavirus argues that a serious attempt at research wasn’t vetted quickly enough and, when published in April, had obvious shortcomings that allowed many to believe that the virus wasn’t as dangerous as it has turned out to be. The one concerning a paper on possible systemic racism by police went through peer review, but the authors say the process isn’t designed to catch fraud and is vulnerable to rigging. In the case of the paper they discuss, a reader caught a major error shortly after publication, and the paper was withdrawn — but not before many used it to dismiss the notion of racism in policing.

Both articles obviously touch on hot buttons, and the specifics of the arguments about the research they discuss could distract from the point I want to make, so I won’t go into more detail. You can read the articles and reach your own conclusions. I’ll just note that both say problems would have been avoided if the virus and racism research had been put in front of devil’s advocates — people whose task is solely to identify potentially bad assumptions, in time to do something about them.

That need for devil’s advocates is a theme I’ve been sounding with corporate America for a dozen years and is especially important now. The New York Times and the Wall Street Journal ran articles recently saying that corporations are starting to believe both that the economic crisis caused by the pandemic will last longer than they had hoped and that the new normal will look quite different. So, a strategic rethink is happening all at once in a whole lot of C-suites, which creates opportunities both for progress and for mischief caused by bad assumptions — that devil’s advocates could head off.

My belief in the power of devil’s advocates dates back to a book, “Billion Dollar Lessons,” that Chunka Mui and I published in 2008, on the lessons to be learned from corporate failures. Out of the 750 major writeoffs that we spent two years investigating in detail, with the help of 20 researchers, we found that 46% stemmed from strategies that should have been identified ahead of time as brain-dead. Think Avon deciding that its main asset wasn’t its door-to-door sales force but was its “culture of caring,” which led the company to buy a medical equipment manufacturer and operator of retirement homes — then quickly selling them at a loss because the cosmetics company had no idea what to do with them. Or, think Blue Circle Cement, one of the world’s biggest cement companies, deciding that it was really a home products company and should make and sell lawn mowers, among many other things — then filing for bankruptcy protection and being acquired.

We posited in the book that loads of people internally must have seen the problems coming but couldn’t stop the strategies because of internal dynamics — for instance, the CEO is often the one championing a new strategy, so the tendency is to want to confirm the idea, not to challenge it. Our subsequent research and consulting, as devil’s advocates, has confirmed our thesis. (We’re not alone, either. Much has been written in recent years about the value of a devil’s advocate, sometimes referred to as a red team/blue team exercise.)

The key issue is: How do you identify problems in a way that’s acceptable within the complex culture of a C-suite? How do you help the company win without making some powerful individual lose — or see the devil’s advocate process quashed if it looks like the CEO will be the loser?

The main answer is to turn the devil’s advocate process into a bloodless exercise. You don’t give the devil’s advocate the power to rule on whether a strategy is right or even to hazard an opinion. The decision needs to stay with the CEO. You simply have the devil’s advocate interview senior executives to probe for vulnerabilities, then use the concerns to identify the assumptions that have to be true for a strategy to succeed. Because the CEO has authorized the process, he or she can face the evidence and kill the strategy without losing face. If the decision is to proceed, the CEO will have a better idea about the pitfalls that may lie ahead.

Choosing a devil’s advocate can be tricky. You can hire an outsider, who will bring objectivity but may take time to get up to speed. You can ask for a volunteer among senior insiders, but few want to be known as the naysayer, at least on more than a one-time basis. It seems to work best to designate an insider, so the whole team knows that the person is simply playing a role. (Irving Janis, in his pioneering 1982 book “Groupthink,” described how President Kennedy designated his brother Bobby to be the devil’s advocate after the administration had botched the Bay of Pigs invasion; Bobby then routinely challenged claims by military leaders during the Cuban missile crisis and may well have saved the world from nuclear war. Quite the endorsement for a designated devil’s advocate….)

As insurers reformulate strategies to prepare for what could be an extended economic crisis and for a rather different world on the other side of it, they should build a devil’s advocate into the process. Companies are making a lot of assumptions, many of which they don’t even know they’re making or made long enough ago that the assumptions have been forgotten. Some of those assumptions are wrong — and many senior executives either know or suspect which ones should be challenged and rethought. (If I had to bet, the biggest mistake that companies in general will make in this go-’round is to underestimate what competitors are doing. The tendency is to see competitors as static, but they’re working just as hard and perhaps as creatively in their strategy rooms as you are in yours.)

By the way, a devil’s advocate approach can help you get better feedback on personal issues, just by having you rephrase questions. Don’t ask a friend or family member if some plan of yours is a good idea. They’ll know you want affirmation and give it to you. Instead, present a plan neutrally, say you’re looking for holes in the idea and ask your friend or relative to help you identify the potential problems. Then, on your own, you can weigh those concerns against the benefits that you’ve already seen.

Knowing about pitfalls won’t always matter. I consistently underestimate how long it will take me to write something, even though I allow for the fact that I always underestimate. But at least a devil’s advocate process will open your eyes to many of the problems that lie in wait out there.

So, challenge those assumptions.

And stay safe.


P.S. Here are the six articles I’d like to highlight from the past week:

Why Traditional Insurance Won’t Work

With the sudden shift to remote-only interactions, insurers can no longer dictate the speed of their transformations.

Tipping Point for Claims Automation

While virtual estimating for auto claims—using photos in place of a physical inspection—is not new, the pandemic has made it the preferred method.

Time to Focus on Cyber Resilience

Here are five ways that businesses should be shoring up potential weak spots in their cyber security program’s incident response plan.

Increased Threats for Manufacturers

Manufacturers must understand that the digital push to run more efficiently creates a security gap that must be addressed.

Blockchain: Golden Opportunity in LatAm

Blockchain provides a golden opportunity for real, tangible operating efficiencies in Latin America and for transforming the region’s image.

How to Recruit Claims Adjusters

One of the most promising solutions to recruiting and retaining workers lies with artificial intelligence—and not in the way that you might think.

Managing Risk in a Pandemic

As companies emerge from government-mandated COVID-19 shutdowns and begin re-opening, they will have to balance a desire to resume operations with the risk of a liability exposure from customers or employees who get sick and claim the business was to blame. In tomorrow’s fragile economic recovery, such litigation could mean the end of a business.

Small businesses and retail in particular will need to take reasonable steps to open safely, following recommended measures to minimize the risk of transmission and infection among people before re-opening their doors to a willing public.

Even if a business adopts all prudent measures, there is so much we don’t yet know about the transmission of the COVID-19 virus or its prevalence that there remains a chance of people being exposed and getting ill. And where there’s a chance of exposure, there’s also a chance of businesses facing liability lawsuits alleging their preventive efforts were negligent and to blame for someone’s illness or death.

If businesses choose to open, and not avoid the risk by remaining closed until safety is more assured, they will have few options to transfer their liability risk. One option eventually will be new pandemic liability policies and endorsements, which are sure to be developed by the insurance industry soon. These likely will be quite costly and perhaps unaffordable to small business until the risk is better quantified. Small business associations might eventually develop group captives or risk-sharing mechanisms as an alternative, but those also will take time to set up and price the risk.

A more fundamental option for non-essential businesses to transfer the risk from opening their doors might be to implement some sort of hold harmless agreement. Such an instrument would require people to waive liability for their voluntary patronage of a non-essential business, such as a retail store, restaurant, hairdresser, sporting event and so on. This kind of agreement seems especially applicable when we know so little about the transmission of the COVID-19 virus, and going out into this unknown environment seems risky.

Hold harmless agreements are widely used but often overlooked. Have you ever read the fine print on a parking ticket, or read the waiver you sign when you participate in an athletic event or activity like a zip line ride? With modern technology, there likely are more efficient digital ways to present a waiver of liability before one enters a business, requiring a person to give consent and to record that agreement.

When a business does all the right things, it shouldn’t bear all the liability arising from a pandemic virus. While a customer may have a reasonable expectation of safety entering premises open for business, with coronavirus unknowns the customer is assuming some risk. Asserting one’s freedom to engage in non-essential activities like shopping for garden supplies, getting a haircut, going to a concert or eating at a restaurant four-top also requires the customer to assume some responsibility for the risk of infection.

When someone engages in a high-risk activity like skydiving, the person typically is asked to sign a liability waiver, acknowledging there are risks and expressing a willingness to assume them. This doesn’t eliminate the risk—it shifts it to the consumer. Obviously, if one doesn’t wish to bear the risk of horrible injury, one shouldn’t jump out of a plane and find the parachute doesn’t work as well as the laws of physics.

We know the industry is looking to develop insurance solutions for the business liability risk, but, if individuals are assuming a greater personal risk, might there be an opportunity?

Maybe this unprecedented situation calls for some form of personal accident insurance, or an endorsement to another policy like health insurance, that would cover medical expenses, loss of income or even death benefits if someone is exposed to a pandemic virus after shutdown orders are lifted. This sort of insurance would not only provide financial relief for a loss, but also peace of mind amid the unknown exposure risks of a pandemic.

Airlines, event organizers and so on could even embed such voluntary coverage in the price of a ticket, perhaps for a limited time at risk, such as a two-week period of incubation after an event.

Maybe there’s also a market for a transmission liability risk, protecting an individual from being sued by another party for causing an infection. This could be structured as an endorsement to liability protection in homeowners or umbrella coverages.

Who knows—for the first time the industry could come up with a product that people want to buy, not one they have to buy.

See also: Rethinking Risk Management in a COVID-19 World  

All of the above presumes that businesses and customers act responsibly and take preventive measures to minimize exposing themselves and others, and do not negligently embrace the contagion. What about situations—which sadly are emerging more frequently as shutdowns ease and people balk at stay-at-home restrictions—in which neither party shows a regard for public safety and exposes themselves and others to a risk of infection?

People may have a right to put themselves in harm’s way, but do they have a right to expose others to harm? Throughout all of our communities are those who choose individual freedom and ignore potential adverse consequences to themselves and their community. This raises a significant challenge to both risk managers and legislators and raises a basic question: Who is responsible for managing the risk of coronavirus transmission?

While there’s a lot of uncertainty and misinformation about COVID-19, there’s almost universal agreement that, once infected, people can spread the virus to others. Borrowing from science fiction vernacular, COVID-19 acts like a microscopic alien life form, with humans as non-voluntary and unwitting hosts. This alien life form enters the body, adapts to the host’s DNA, thus converting every host into a potential killer. Even when a host is unaffected by symptoms, and may forever be unaware of having been a host, COVID-19 makes all infected people the contemporary version of a Trojan horse.

For policymakers, carriers, regulators and consumers thinking about ways to provide an incentive people to better manage this risk, consider the following “what if” scenario about introducing potential consequences of not following current mandated guidelines meant to manage the spread of COVID-19.

Let’s assume that, in a rebound of the virus later this year, the capacity of medical resources to care for the infected and ill ranges from scarce to completely overwhelmed. What if our individual access to the full measure of available medical services were to become largely decided by our own choices and risk management attitude? 

Person A goes to a hospital to be tested. The attending physician captures the person’s contact history over the prior week. On the list is a sports bar and grill, which brings follow-up questions regarding that establishment and whether it followed social distancing and personal protective equipment guidelines. The patient replies, “The place was jammed, they had a band, and you couldn’t find a mask anywhere. It was great—just like old times!” The physician thanks the patient and promises to follow up with the test results. Patient A later receives a call at home. “We got your test back and are sorry to inform you of a positive result. We have already called in a script for a Z-Pak. However, I must also inform you we cannot treat you in the hospital if your condition worsens given that you chose to ignore current safety guidelines. We have limited capacity, and every serious case puts our staff at risk. We hope you feel better soon.”

Patient B also tests positive. This patient’s contact history reflects adherence to established guidelines regarding social distancing and protective gear. This patient gets a phone call that goes something like this: “We got your test back and are sorry to inform you of a positive result. We have gone ahead and called in a script for antivirals. I can assure you that, should your condition deteriorate, we will treat you here in the hospital.”

We believe insurance can offer solutions to help responsible businesses and individuals transfer some of the financial risk arising from a pandemic, but we also caution against a mindset that whenever a loss occurs “insurance can pay for it” without also introducing incentives for businesses and individuals to be smarter about risk management.

Parametric Insurance: Is It the Future?

Read this, and you’ll be on your way to knowing more than 99% of what anyone else in insurance knows about a topic that’s attracting a lot of interest. That makes you an expert, in my opinion.

The debate is heating up just now about who should pick up the cost for messy losses — the kind that are hard to model and frequently excluded or defined rather vaguely in insurance contracts. Right now, of course, all the focus is on who should (and how to) cover the various costs arising from pandemics. Covid-19 today, and whatever hits us next time. The problem is being kicked around between insurers, governments and the capital markets.

One way or the other, we’re all going to end up paying, but life will carry on, and there will be even more need for creative solutions to the world’s tricky problems.

So it’s worth looking beyond this current bun fight to consider one innovative funding mechanism that has, in some cases, radically changed the most basic nature of insurance. It’s already providing at least one solution for covering pandemic losses and has been applied to many other complex or large events.

Parametric insurance offers financial protection against losses that are often hard, or even impossible, to get insurance for. Parametric structures are attractive to capital providers from outside of insurance (hedge funds, banks, pension funds and dedicated investment vehicles). When designed properly, parametric-based insurance products ensure that claims are paid fast, and without dispute.

In the second part of this article, I’m back to review 10 companies I recommend to watch that have been leading the way in designing or using parametric insurance and structures. But first, a quick primer on how parametrics work to get you in the mood for reviewing the recording of our InsTech London live chat event on BrightTALK from April 30.

Traditional indemnity insurance, the kind we are all familiar with, pays out based on the cost of the loss incurred, as decided by your insurer and its loss adjuster. Parametric insurance pays out when a pre-defined event occurs and breaches a pre-agreed figure or index. Examples of perils covered and typical triggers include hurricane (wind speed), flood (height), earthquake (shake intensity), pandemic (number of infections) or cyber (reported data breach).

The not-so-new new thing

Like a lot of great new ideas, parametric insurance isn’t actually that new. Catastrophe bonds, or insurance-linked securities (ILS), have been around for 25 years. It’s worth taking a moment to understand how that market has developed when considering what might come next.

Today, the ILS market provides $100 billion of protection, most commonly used as a replacement for conventional reinsurance or retrocession covers. The majority of that capital now comes from outside of insurance. Most ILS bonds still use traditional indemnity losses to define payout, but parametric triggers have been used for 15% of these bonds. Investors like parametric structures because there is less risk asymmetry between the investor and the issuer (the original insurer). This means that investors know as much about the risk being covered as the original insured does (not the case for indemnity insurance).

See also: Growing Case for Parametric Coverage  

Coverage for ILS bonds is usually in the hundreds of millions of dollars, and payment structures have become increasingly sophisticated. At the time of writing. the $500 million pandemic catastrophe bond issued by the WHO is considered to have a high probability of being triggered. (Steve Evan’s Artemis is the best source of information on catastrophe bonds. His (free) deal directory provides fascinating insights into the variety of bonds issued since 1996. Of these, 104 are parametric. Definitely worth a read when you’ve exhausted the Netflix movie catalog.)

Going back upstream and down in size

Ever since the earliest catastrophe bonds in 1997, there has been interest in making parametric coverage available to large corporations as well as insurers. Oriental Land, the owner of Tokyo Disneyland, took out a $200 million bond for earthquake cover in 1999 that was based on earthquake shake severity. It’s proved tough, though, for brokers to convince risk managers at large corporations to switch from conventional insurance structures to this new type of cover. Few have been willing to bet the company, and their careers, against mostly untested structures with significant costs and an element of basis risk. (Basis risk is the potential for the payout from parametric insurance to be insufficient to cover the true cost of the loss in the way expected).

The first wildfire catastrophe bond, for $200 million, was placed in 2018 and issued by another corporation, Pacific Gas & Electric (PG&E) the California utility company. Wildfire lends itself to parametric cover, but the bond was structured as a traditional indemnity cover. The bond was subsequently triggered and presumably paid out when PG&E picked up $13.5 billion in liability from wildfires in 2018.

The innovator’s tool kit

But you don’t need a $100 million problem to use parametrics. Parametric insurance is particularly interesting for people or companies looking at ways to introduce innovation into insurance. As you’ll see in part two, parametric insurance can actually work very well at a highly localized level, to provide cover for an individual building or field. Parametrics open up opportunities to those that can build, or tap into, a source of reliable data, preferably with years of historical records, that can be used to create indices that correlate with financial losses. These can be particularly valuable if the data source is exclusive. 

We’re seeing lots of interest in IoT, but to date there have been few public and credible uses cases for insurance applications. Parametrics and IoT are a natural pairing. Providers of distributed ledger technology (DLT), which can be used to power smart contracts, have been sitting on the sidelines for years now, patiently waiting for a problem to apply their solution to. DLT could be a vital part of parametric insurance, although hang on to your investment dollars for now. DLT is not always essential for parametric triggers. Other choices are available.

The established ILS market will continue to grow, but companies have, until recently, not had many opportunities to use parametrics — unless they had the appetite and chutzpah to issue a cat bond.

That is starting to change. Technology-enabled MGAs and brokers with clients that are struggling to get the insurance they need are starting to turn to parametric insurance. The concept has also been used for a number of years in microinsurance, as I discussed back in 2015. 

At InsTech London, we’ve been delighted to bring you many of the founders and leaders of teams running and building parametric products onto our stage, through our interviews and on our podcasts. Now we are also bringing you our favorites through our digital live chats on our BrightTALK channel.

I’ve seen the ILS market evolve over the last 20 years. Not every catastrophe bond has performed as expected when the wind blew or the earth shook (or indeed when the world’s banks hit the buffers in 2008). Parametric insurance is still some way from having complete solutions to many of the hardest problems. The world is full of surprises. Odd stuff happens at the edges of our experience. Some parametric solutions will fail to deliver. But innovation flourishes in adversity, and we are starting to see some very intriguing solutions emerging.

If you are looking to learn more about what has happened in this space, and how the future will evolve, then follow the link to the 10 companies I recommend looking at.

See also: COVID-19: Moral Imperative for the Insurance Industry  

If you’ve found this interesting, then you’ll definitely enjoy our live chat discussion on “The Role of Parametric Insurance in Post-COVID world” recorded on April 30 and brought to you and co-hosted with our friends at Qomplx.

Does all this make sense? Do you agree? Who’s on your top 10 of parametric companies to watch? Feel free to add comments, share and all the other fun stuff you can do with Linkedin these days. 

I co-lead InsTech London, bringing together the most interesting people with intriguing ideas face to face, online or however you prefer. Now up to episode 80 of the weekly InsTech Podcast, CII-certified (the podcast, not me). We’re delighted to be supported (i.e. get money from) almost 100 corporate members (with room for more) as well as a community of over 5,000. If you need a bit more in-depth analyses or help, head over to Abernite website to see what I am up to there.

How Insurers Are Fighting the Pandemic

It already seems like ages ago that we were able to go out at night. In most countries, the bars, restaurants and clubs are closed. In the basements of those places, there are tanks that preserve up to 1,000 liters of beer. But when time passes, the quality of that beer declines. So, what do you do with all that beer? It’s probably too much for the proprietors to drink it all themselves during this period of social distancing. 

Royal Swinkels, the brewery of Bavaria beer, has come up with an excellent and sustainable plan to give the beer another purpose. The brewery recalls the beer, removes the alcohol and recycles that into disinfecting hand soap. Next, ten thousand liters of hand-sanitizing products are distributed among hundreds of hospitals, doctors offices and nursing homes — for free.

Even though there is a lot of despair in this time, it’s beautiful to see emerging, creative and especially heart-warming initiatives. There are numerous examples — more and more insurance carriers, startups and other tech companies that are part of the DIA Community are lending their talent and technology to help the world fight the pandemic. 

Our analysis shows that each solves very specific problems. The opportunities seem endless. 

We defined eight categories in which they provide new value, each tapping into real needs, proving the relevancy and social impact of the insurtech and insurance community.

1.  Educating what coronavirus is exactly and how to know if you have it
There are a low number of quick assessments for people with COVID-19 symptoms that provide reliable recommendations and next steps. Consequently, medical professionals and health systems are overburdened by too many cases

Infermedica (Poland) provided a solution that cuts both ways. The company developed a screening protocol based on the official guidelines by WHO. It’s free, has been translated into 20 languages and can be used within minutes. This way, Infermedica hopes to help as many people as it can. 

2.  Knowing what to do if you’re abroad

Expats and travelers who are in countries abroad have difficulties finding general and country-specific COVID-19 information. It can also be quite a challenge to get tested or to find medical help, if necessary. Every country has specific requirements and is not always able to offer assistance in English. 

Air Doctor (Israel) created a comprehensive country-by-country guide that includes general information as well as details on where to find help. By using this guide, expats and travelers can comply with specific country requirements, limit exposure to others and help to flatten the curve. 

See also: How to Lead During the Pandemic  

3.  Preventing infection and spread of the virus

We all know we should avoid touching our face to prevent the coronavirus from getting us sick. But this is easier said than done. 

Slightly Robot (U.S.) redesigned a wearable that stops another type of harmful touching — trichotillomania, a disorder that compels people to pull out their hair — to one that prevents you from touching your face. The Immutouch wristband senses your hand movement 10 times per second and will vibrate once you touch your face. This way, Slightly Robot will support you in the fight against getting yourself infected with COVID-19.

4.  Offering relief to the overloaded doctors offices

A lot of people with symptoms are in doubt if they have corona. Doctors appointments cause unnecessary movement and physical contact that increases the risk of further spread. Physical appointments are also extremely time-consuming and cause the first line of medical aid to be overloaded.

To help people as well as the medical system, AXA Belgium developed a digital medical consult. Patients dial in, answer a few questions and receive an appointment with the doctor. A doctor calms, advises or refers a patient. With teleconsultation, the risk of spreading the virus is reduced, while the first aid line is still available for those who need it. 

5.  Lightening the workload in hospitals 

Every day, we read about the patient flows resulting from the COVID-19 outbreak, leading to increased scarcity of critical care capacity. 

Philips provides healthcare institutions with telehealth solution to process healthcare requests via online screening. Patients infected with the virus can be remotely monitored through automated questionnaires about their home situation and state of health. The telehealth solution aims to prevent unnecessary visits to hospitals and enables the remote monitoring of the vast majority of COVID-19 patients who are in quarantine at home as an alternative point of care. 

6.  Securing sufficient resources for medical aid  

In many countries, there is a genuine fear that the number of emergency ventilators and other equipment to treat COVID-19 patients is not enough, even leading to a run on equipment. But there are also new initiatives to produce more, quickly and efficiently. 

To be able to save as many lives as possible, Munich Re and Frauenhofer Research Institute set up the Give A Breath Challenge to find the best 3D-printable designs to enable immediate, decentralized production. A jury will decide on the best design, and this design will eventually be produced. The challenge has funding (for prize purses and a realization fund) of at least €1 million.

7.  Understanding COVID-19 better to predict and contain the virus

The current pandemic asks for a speedup in processing test results for COVID-19. But how can you speed things up when test results need to be put into spreadsheets manually, taking several hours or longer to complete? 

UiPath (Romania/U.S.) launched a pilot project with software robots that can sort and distribute test results from the hospital’s on-site lab in minutes, enabling staff to quickly put infection prevention and control measures in place where necessary. By automating the process, nurses and other specialists in the hospital’s infection control department are freed up to spend more time with patients.

See also: Chaos in a Post-Yesterday World!  

8.  Maintaining personal well-being in pandemic times

Maintaining healthy habits and personal well-being during a pandemic can be difficult. Virgin Pulse (U.K.) offers members a specific toolkit and integrated programs to track Covid-19 healthy habits, to ensure people stay mentally, physically and financially fit. This self-service hub, available in 100-plus languages, serves as a COVID-19 Homebase. Virgin Pulse teamed up with Aaptiv, Enrich, meQuilibrium, Monj, Whil and Zipongo to provide free access to health and wellbeing programs and resources for people to navigate this pandemic in a positive, healthy way. Examples include cardio classes, chef-led cooking demos and mindfulness audios put into a gamified app that offers challenges and rewards to track your healthy habits.

Would Form of TRIA Work for Pandemics?

Currently, there is a movement by some industry personnel and legislators to expand the Terrorism Risk Insurance Act (TRIA) to include pandemics. There is a discussion draft of a bill, and a summary of that bill here.

So, is a federal backstop program that is part of, or similar to, TRIA feasible or advisable? It’s too early to tell, but below are some initial caveat emptor thoughts.

FIRST, TRIA has not been tested, so we don’t know if this backstop program actually works, how well it might work and how it might affect the insurance industry’s ability to assume risk in the future, much less be able to effectively respond to terrorist acts. In addition, for a claim to fall under TRIA, it must be caused by a traditional covered peril found in most property insurance policies. In the case of PRIA, the pandemic itself is the peril, and it can affect the entire population.

SECOND, following that thought, the industry has significant financial assets but not manpower. We’ve already seen how difficult it is for government and all of its resources to respond to regionally localized claims involving hurricanes, tornados, flooding and wildfires. The ability of the insurance industry to adjust claims on a nationwide basis would likely be extremely limited, raising the question of whether “insurance” is the proper mechanism for responding to truly catastrophic national or global exposures like pandemics.

THIRD, just as the manpower issue cannot be understated, neither can the required expertise of adjusters. PRIA would likely present a far greater indirect loss exposure than TRIA due to both the scope of losses and the impact of government-mandated business shutdowns, curtailments or operational modifications. The most significantly affected traditional insurance coverage is business income. This insurance product is one of the more complex in the industry, and, as a result, claims are FAR more difficult to adjust and require FAR greater expertise from adjusters than direct property claims.

Specifically with regard to TRIA, so far, most terrorist attacks have been localized. While it’s possible that a terrorism attack could have a much more widespread impact, absent a war-like action of a nation the risk is probably substantially smaller than the potential economic impact of a nationwide pandemic. As a result, the maximum possible (or perhaps probable) loss in a pandemic is likely to be measured in the trillions, not billions, of dollars.

See also: 3 Challenges for Pandemic Coverage  

FOURTH, TRIA is optional. Businesses do not have to buy TRIA coverage. Not long after TRIA was passed, a study conducted by the Council of Insurance Agents & Brokers (CIAB) found that fewer than 10% of small businesses and 20% of larger businesses purchased terrorism coverage where the cost was an additional 10% to 20% of their existing P&C premium. By 2013, the Congressional Research Bureau estimated that 60% of businesses had terrorism insurance, though that number was likely much smaller in higher-risk areas, where the coverage could cost thousands of dollars. According to a more recent report, this number has remained fairly constant, most likely due to the affordability of the coverage given the lack of terrorism incidents.

Can PRIA truly be an optional coverage, or must it be mandatory? Because the risk of a pandemic, in both frequency and severity, is presumed to be far greater than anticipated terrorist attacks, insuring it will likely be far more expensive than TRIA coverage. If so, it’s quite likely that few businesses would purchase it if they want to remain competitive with those businesses that don’t buy in. Given that huge numbers of businesses can be affected by a pandemic, what would become of the perhaps sizable majority of businesses that don’t purchase the coverage? Would the government simply allow them to go out of business? Highly unlikely. And, if interest-free loans or grants continued to be available, it’s even more likely that greater numbers of businesses would rely on that fail-safe mechanism than paying large amounts for insurance coverage they may not need in the short term.

In addition, if the impact of a pandemic is likely to be far more significant in densely populated areas, much like flood insurance, adverse selection may play a role whereby even fewer businesses in sparsely populated areas will purchase the coverage even if priced lower than densely populated areas. And how might the uninsured otherwise affect the insured? Contingent business income coverage is critical to some businesses. For example, a business that has one or only a few suppliers or customers could be out of business if they suffered a loss. That likelihood is dramatically increased if they elect not to participate in a PRIA program such that the subject business would have an even greater need for contingent coverage.

Given these possibilities, would a mandated program be more feasible? For example, in response to civil unrest in the late 1960s, the insurance industry implemented a system of civil disorder charges that applied to ALL commercial property rates. The charge varied geographically based on presumptive risks. In the case of a pandemic, where the exposure is far more widespread, to generate the insurance proceeds needed, it’s quite possible that a mandatory funding mechanism could be indicated. Otherwise, an optional program is likely to fare far worse than the current federal flood insurance program, which still does not use actuarially sound rates, suffers from adverse selection and operates in the red year after year.

FIFTH, is traditional business income insurance even a feasible risk management approach to a catastrophic pandemic? As mentioned earlier, business income coverage is a complex product that requires significant financial skill and analysis. Determining loss amounts is far from an exact science and, in fact, often involves a great deal of conjecture and supposition that usually leads to negotiated settlements. In the case of a pandemic that can affect hundreds of thousands (or more) businesses over a very short time, what private sector industry has the manpower and expertise to adjust claims rapidly to the satisfaction of business owners?

IF a PRIA program is remotely feasible, it would probably have to be based on a nontraditional and simplified insurance product. Perhaps, rather than base the amount of coverage on a complex “business income” calculation that requires speculation about all forms of revenue, expenses and profit, the coverage should be limited to only “continuing expenses,” including payroll, to remain in operation for a specified period. The approach would be more analogous to the Maximum Period of Indemnity option currently available in ISO’s business income program.

See also: How to Lead During the Pandemic  

A simplified product covering only continuing expenses for a limited period, such as four months, MIGHT be workable in a mandated basis, but great care must be exercised in constructing and administering such a program. And, keep in mind that, in risk management circles, primary coverage should be provided by the entity with the greatest control over the exposure. In the case of pandemics, that would be the government.