The other day, I was watching President Trump’s daily pandemic briefing. The president stated, as the Wall Street Journal outlined in the article Politicians Push Insurers to Cover Business Losses, “that restauranteurs told him they paid for business-interruption coverage for decades and ‘they’ve never needed it. All of a sudden, they need it,’ and their insurers ‘don’t want to pay up.’”
Regulating Insurance
What are the implications of this? The article goes on to talk about how US Representative Pramila Jayapal is writing letters to insurer CEOs asking them to justify not paying out on business interruption policies due to COVID-19. I am also aware of several states, e.g., Ohio, New Jersey, that want to force insurance carriers to payout.
The federal government has not regulated insurance in the US, outside of SIFI. Is the government—federal or state—allowed to override explicit policy exclusions? Insurers did not price these policies with pandemic risk in mind; many policies have specific pandemic exclusions that organizations introduced after the SARS outbreak. The insurance industry could become insolvent if the government forces it to pay out to every business the pandemic has impacted.
Balancing Civic and Corporate Responsibilities
It is crucial to be a good corporate citizen in this difficult time. The challenge for the insurance industry is figuring out how to be a good corporate citizen without destroying insurance companies, which would impact employee livelihood and the financial security of policyholders who paid premiums to those insurers.
The federal government is considering a backstop for pandemic-related losses, i.e., the Pandemic Risk Insurance Act (PRIA), which would charge insurers an annual premium. The government would reinsure the risk if the loss exceeded a certain level—with up to 95% covered for the US. This model is similar to the terrorism backstop. If the government were to put PRIA in place, insurers could pay while knowing that the government would reimburse them. Without a federal government backstop, business interruption claims will work their way through the courts, delaying settlements and putting risks on insurers that could cause them to be downgraded.
The article notes that P/C insurers have a net worth of $800B. Losses are running $250B per month or more. As CHUBB CEO Evan Greenberg warns, the insurance industry could be bankrupt after a few months at this rate. Fighting a growing number of states, as well as the federal government, to prevent claims payouts in areas like business interruption, life insurance, and workers’ compensation will introduce political risks, given the emotional nature and severity of the pandemic. However, paying claims and refunding premium (as auto insurers like Allstate have done) provides advantages and goodwill.
The Benefits of PRIA
The importance of working at the federal level to pass PRIA is obvious to prevent insurance carriers from going bankrupt. There are several influential lobbying groups, including the Financial Services Roundtable, that can work with the house of representatives and the senate to build bi-partisan support for the backstop. Passing PRIA will allow carriers to be responsible to society and the people the pandemic has harmed as well as to their policyholders who need their insurance companies to remain viable.
Having the US government be the reinsurer of last resort for the pandemic will provide benefits to society, policyholders, and shareholders and be good for society as a whole.
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