Tag Archives: pria

PRIA: A Tale of 2 Policyholders

A discussion draft of the “Pandemic Risk Insurance Act” has circulated over recent weeks. Based on the Terrorism Risk Insurance Act, the text is an excellent jumping off point to think about what would work and what would not.

The draft quickly forces to the surface an uncomfortable reality that a TRIA-style “make available” requirement would separate policyholders into the haves and the have-nots. 

Large corporations with the financial wherewithal and sophistication to establish their own pandemic risk insurance companies may structure multibillion-dollar bailout plans free from government intrusion into executive pay, share buyback plans and layoff strategies. More than 500 such “captives” already participate in the Terrorism Risk Insurance Act and could claim as much as 95% of federal funding under that program.

Small and medium-sized businesses, churches, school districts and other nonprofits and local governments would not fare so well. These regular policyholders cannot afford to set up their own insurance companies. The standard insurance policies available to them only cover business interruption losses caused by “property damage.” PRIA’s “make available” requirement would cancel out a pandemic or virus exclusion – it does nothing to address the necessity of property damage.

A large corporation can simply negotiate with itself to remove the prerequisite of property damage. Regular policyholders would have to file lawsuits seeking a judicial finding of property damage as is happening right now in the context of COVID-19. 

The discussion draft should be focusing attention on the needs of regular policyholders. Once we have a solution that works for them, we can worry about what the program can do for insurance companies and large corporations.

You can find the full report here.

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.

The Messaging Battle on COVID-19: Are Insurers Losing?

Many insurers have made grand, public gestures, returning some $10 billion of premiums to customers whose lives and businesses have been put on hold by the coronavirus, but I’m not sure customers have really noticed. I worry that the insurance industry is losing the messaging battle at a crucial time. We risk being relegated to the traditional role of the bad guy, hiding behind lawyers to deny any and all claims, at a time when we need to be helping customers as much as possible–and need to be seen doing that good work.

Already, some politicians are trying to turn coronavirus into a sort of asbestos, making the insurance industry cover risks that it never signed up for. Yes, with SARS serving as a warning in the early 2000s, the insurance industry wrote policies in recent years that excluded pandemics, in a way that the industry never explicitly excluded asbestos, but public opinion is a funny thing: Groundswells can develop if they aren’t headed off at the beginning. And politicians respond to groundswells. After all, it’s people who vote, not corporations.

To try to figure out whether the industry had already lost the battle for public opinion, and what more the industry could be doing, I called an old colleague who has been doing PR for major insurance clients for decades. (We’ll just call him Sam, because he wants his clients, not him, to be the story.) The good news is that he said the battle isn’t lost yet. The bad news is that Sam thinks the industry needs to do a lot more to get the message out that it’s living up to its responsibilities while helping clients however possible.

“A lot of people hate the insurance industry,” Sam said. “Here’s how they see us: Clients pay us a bunch of money, then they have an issue, file a claim, and the insurance company hires a lawyer to fight them–over a product they bought but never received.”

He said it’s crucial to keep hammering away at the message that insurance companies are in the business of paying claims. They wouldn’t have any customers if they didn’t pay claims.

“That message gets tricky, of course,” Sam said, “because the customer hears, You pay lots of claims, just not mine…?”

Some industry leaders–including Evan Greenberg, CEO of Chubb, and John Neal, CEO of Lloyd’s–have seemed to make headway with repeated assertions that the industry can’t be saddled with risks it wasn’t paid to take on and, in particular, that it simply isn’t practical or fair to expect insurers to cover what amounts to the cost of a war.

Hitting those themes, a Washington Post columnist wrote, “While the businesses that are currently shuttered didn’t do anything wrong, neither did their insurers…. Since everyone is getting the benefit [from the shutdown], everyone should pay for it: through borrowing now and taxes later. Think of it as Americans belonging to one of the largest mutual insurers in the world: the United States of America, Ltd.”

Sam said the industry doesn’t do itself any favors with legislators or customers by referring to its capital as surplus or reserves. “Reserves? Surplus? Come and get it!” he said.

But he said the argument against raiding reserves is pretty straightforward: Claims for business interruption would be some $300 billion a month, for an industry with $800 billion in reserves–and, oh, by the way, that money isn’t just sitting there; it’s set aside to pay other claims that insurers already face. The industry wouldn’t last long in the face of such claims.

Neal has said that just paying legitimate claims will already make COVID-19 the most expensive event in the history of insurance.

The fact that Marsh offered a pandemic policy two years ago and got no takers seems to resonate in conversations I have with folks outside the industry: It hardly seems fair to make insurers pay on policies that customers declined to buy.

But Sam said insurers need to get beyond the defensive. “Nobody reads the fine print until something goes wrong,” Sam said, “and if you’re spending all your time defending the exclusions in the fine print, then you won’t be able to get the stink off you.”

Going on offense means working–as publicly as possible–with governments to prepare for the next pandemic. contributing as much wisdom, technique and discipline as possible. That sort of work has already begun in the U.S., with what’s being referred as PRIA (a pandemic version of the Terrorism Risk Insurance Act, or TRIA), and in Europe, with what’s being called Pan Re.

Sam said that, while insurers need to stick with a hard no on business interruption claims under policies that were never designed to cover pandemics, they need to say yes in every possible way on service to customers in these difficult times.

“We have to cushion the blow as much as possible,” Sam said.

When the industry does good things–and I see many–it also needs to toot its own horn more. Maybe the messages are getting lost in the shuffle because of everything else going on, but it seems to me that the industry could do a lot more to dramatize how it’s helping clients. The world is hungry for good-news, human-interest stories these days. Yet a friend of mine told me that his auto insurer, one of the top five, didn’t even notify him of a rebate on his premium.

“I saw the news about premium rebates, so I called my company,” my friend said. “They told me, yes, we’re rebating X dollars. I said, “That’s great, but was I just supposed to notice on my statement, or were you ever going to tell me?'”

I suggest we tell people as often as they can stand to hear. So far, insurance commissioners seem to be siding with the carriers on business interruption policies, but lots of other forces are aligning against the industry. Consumer groups are complaining, and politicians are listening. Some civil authorities are using language in shutdown orders designed to trigger insurance coverage, and legislators in several states are considering forcing insurers to cover business interruption claims on the pandemic. Even the president said two weeks ago that insurers should cover many claims. The plaintiffs bar is, of course, ready, willing and able to help with such claims.

If Sam is right–and he’s more optimistic than I am–then the industry has time to stand up for itself. But time is running short. If the tide turns, it will likely turn for good.

Stay safe.

Paul Carroll


3 Challenges for Pandemic Coverage

The nation’s immediate strategy to support businesses affected by the COVID-19 pandemic has now formed around a portfolio of emergency federal loan and grant programs authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As these programs become operational, policymakers are turning their attention to the risk of future pandemics.

When confronting the “new” risk of terrorism nearly two decades ago, policymakers forged the Terrorism Risk Insurance Act (TRIA) as a public-private partnership with shared financial responsibility for terrorism losses but heavily relying on the commercial property and casualty insurance industry’s product design, operational and claims administration capabilities.

Naturally, TRIA has emerged as a leading model for a future pandemic program – generally referred to as the Pandemic Risk Insurance Act (PRIA). While a reasonable starting point, TRIA is far from an off-the-shelf catastrophe risk program.

Congress designed TRIA to progressively recede from the terrorism insurance marketplace until expiring three years later. This temporary program is now in its fourth extension, guaranteeing a total program life of at least 25 years. Not a single dollar has been paid out from the federal backstop — owing more to the success of the U.S. law enforcement, defense and intelligence communities than to any beneficial feature of the program itself. While TRIA may offer the reassurance of longevity, this model remains (thankfully) wholly untested, such that any underlying design flaws only become visible on careful inspection.

We can test the efficacy of PRIA by answering three questions related to our current experience with the loan and grant programs authorized by the CARES Act:

  • Which businesses should be entitled to claim benefits under the program?
  • What benefits should be available?
  • Who has the infrastructural capabilities to deliver the necessary benefits?

Eligible Businesses

CARES Act loan or grant programs are available to nearly all businesses that meet the size requirements. An otherwise eligible business must certify merely a general need for financial relief as a result of the pandemic such as that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

PRIA would reach far fewer businesses. Under that program, insurers must first offer a policy of commercial property insurance without a virus or pandemic exclusion. No business is required by law to purchase it. In fact, under TRIA, only half of all businesses pay a premium for the removal of the terrorism exclusion. According to data released by the U.S. Treasury, 29% are informed that there is no additional charge for removal of the terrorism exclusion and the rest simply opt not to pay the average 2.5% additional premium.

We do not know how much insurers would charge to remove a virus or pandemic exclusion as required by PRIA. However, it is likely to be much more than the current charge to remove terrorism exclusions. As a rough benchmark, it takes the insurance industry about 10 years to charge enough terrorism premium to equal the amount of commercial property insurance losses from Sept. 11. It would take 125 years to collect enough premium just to equal the initial round of funding for the CARES Act’s Paycheck Protection Program.

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

Take-up rates for policies without virus or pandemic exclusions under PRIA will certainly be somewhere far less than 100%. Even if three-quarters of policyholders pay for the removal of the exclusion, many U.S. businesses would be left with no economic support in the event of another pandemic. If the cost of coverage is more than a couple of percent of total policy premium, take-up rates would be even lower, leaving vast amounts of the U.S. economy “willingly” exposed.   

Covered Losses

CARES Act programs are largely aimed at encouraging businesses to keep employees on the payroll. For example, Payroll Protection Program loans can only be used to cover expenses for payroll, rent, mortgage interest and utilities. If at least 75% of the loan proceeds are spent on payroll (subject to caps on high earners) during the first eight weeks, the entire loan is forgiven.

Business income coverage under a standard commercial property insurance policy also covers the expense of continued payroll, rent and utilities. However, insurance also covers the profits a business would have made and the full amount of salaries, including those paid to high-earning executives. While those benefits are more generous while they last, Civil Authority Coverage typically only extends to the first four weeks of a government-ordered shutdown (half the time period of the Paycheck Protection Program).

Of course, not every policyholder purchases a typical policy. Under TRIA (and therefore our hypothetical PRIA), captive insurance companies are full-fledged participants in the program. A captive is an insurance company set up and owned by its policyholder, typically a large corporation. Hundreds of large corporations (including the New York Times, Credit Suisse and the New York Stock Exchange) have established captives, allowing access to TRIA on far more favorable terms than those available via the traditional insurance market. For example, while small businesses are effectively shut out of property insurance coverage for terrorist attacks using nuclear or radiological weapons, a large corporation can negotiate with its insurance subsidiary for hundreds of millions or even billions of dollars of such protection, with 80% of the losses picked up by the federal backstop.

Large corporations would surely deploy these same strategies to maximize the value of PRIA. While a small business may be lucky to afford the standard four weeks of Civil Authority Coverage, a big business could ask its captive to provide coverage for 40 weeks or even 400. Certainly, the captive would not impose on its corporate parent restrictions on share buybacks, dividends or executive bonuses such as those demanded by the CARES Act’s Main Street Lending Program. 

Claims Administration Capacity

TRIA contemplates that insurance companies possess the claims administration capacity to manage up to $100 billion of shared industry and federal losses. Hurricane Katrina was the largest property insurance event in U.S. industry’s history, resulting in about half that amount in paid claims.

Under the CARES Act, U.S. lenders have been called on to administer $349 billion in loans through the Paycheck Protection Program and a further $600 billion through the Main Street Loan Facilities. Just the initial funding of the Paycheck Protection Program is the equivalent of insurance companies facing down claims from Hurricanes Katrina, Maria, Irma, Andrew, Harvey, Ike and Wilma, Sept. 11 and the Northridge earthquake all at the same time, together with 10 years of National Flood Insurance Program and National Crop Insurance Program claims. The insurance industry is simply not designed to operate at that scale.

See also: 10 Moments of Truth From COVID-19  

A Path Forward

While there are other “glitches” in the Terrorism Risk Insurance Act that should give us pause before expanding the model to include pandemics, the three points explored here should be enough to warrant a thoughtful debate about the objectives of any proposed pandemic risk management program and how best to implement it.  

For example, we may find insurance companies can make available policies without virus or pandemic exclusions, but small businesses are unwilling to bear the consequent cost. A program with low take-up rates is worse than no program at all. Today, we can extend loans and grants to businesses that did not have the choice whether to buy insurance coverage. Once we have PRIA, we cannot. 

Similarly, we may find the business income loss benefits made available to small businesses are modest and difficult to trigger compared with loan forgiveness under the Paycheck Protection Program. Meanwhile, large corporations can use their captive insurance companies to engineer bailouts that make the terms of the airlines’ $25 billion Payroll Support Program look stingy.

Finally, we may conclude business income coverages in standard commercial property insurance policies are too complex to quickly administer during a pandemic. We may also come to believe insurance companies should invest more heavily into maintaining robust catastrophe claims management capabilities.

If we do not get to the bottom of these challenges before committing to a new pandemic program, we will surely struggle with them when we most desperately need the program to work.