$500bn Pandemic Risk Insurance Act (PRIA) reinsurance program in the works

Draft legislation to form a U.S. Federal government backed reinsurance program for pandemic insurance claims is under discussion in the halls of power, with a bill perhaps ready to be submitted to the House before the end of this month.

As we explained back on March 25th, the U.S. House Financial Services Committee called for the passing of a Pandemic Risk Insurance Act (PRIA), to support the insurance and reinsurance sector’s ability to handle claims from the Covid-19 coronavirus pandemic.

Our sister site Reinsurance News reported yesterday that a legislative effort to push forward a Federal Pandemic Risk Reinsurance Program, designed to cover insured losses arising from public health emergencies, is progressing in the U.S.

Now, a copy of the discussion draft document has made its way to us and the mooted bill calls for the passage of the Pandemic Risk Insurance Act of 2020, to allow for the formation of a Pandemic Risk Reinsurance Program.

It’s no surprise that the draft is a priority of Chair of the House Financial Services Committee, Congresswoman Maxine Waters (D-CA), who has championed early calls for insurance and reinsurance support from the Federal government.

The draft bill calls for “a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicative disease.”

The goal of any Federal pandemic reinsurance facility is to protect consumers, “by addressing market disruptions and ensure the continued widespread availability and affordability of business interruption coverage for losses resulting from a pandemic or outbreak of communicative disease.”

While also allowing for, “a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving State insurance regulation and consumer protections.”

Re/insurers would have to pay a premium to receive coverage from the government backed pandemic reinsurance program, while the facility would only kick-in and be triggered when industry losses from a pandemic or outbreak exceeded $250 million, up to a level where aggregate industry losses are capped at $500 billion annually. Participation in the program would be voluntary for re/insurers.

The design of the proposed Federal pandemic risk reinsurance backstop is similar to the Terrorism Risk Insurance Program (TRIP), that was established in the wake of the 9/11 terror attacks.

The U.S. Treasury would be called on to form the Pandemic Risk Reinsurance Fund as a vehicle to store the premiums paid by re/insurers for access to the pandemic reinsurance facility.

Importantly, the discussion bill draft would cause exclusions to be voided where they excluded coverage that the PRIA pandemic reinsurance program would provide, so enabling policyholders to claim on business policies on the basis of PRIA coverage, it seems.

At the moment the draft bill discusses nothing related to retrocession for the pandemic reinsurance program, or risk transfer.

It would be prudent for the bill to at least declare that the program could leverage other reinsurance and capital market alternatives to transfer some of the risk, where possible, including through the use of reinsurance alternatives such as catastrophe bonds or insurance-linked securities (ILS).

While a significant amount of the risk held by such a Pandemic Risk Reinsurance Program would not be economically reinsurable, there is surely some level of risk within it that could effectively be carved out, and transferred or hedged to capital market or other sources of capacity, thereby making the program more sustainable and reducing the reliance on the Federal government or taxpayers at the same time.

It will be interesting to see how quickly this legislation can pass, given the focus right now on ensuring businesses can benefit from their insurance coverage as much as possible under these pandemic conditions.