Global insurance and reinsurance company Chubb has published the details of a proposal for an enormous $1.25 trillion public private risk sharing facility to protect both small and large U.S. businesses against future pandemic risks, with part of the coverage proposed to be structured on a parametric trigger basis.
The size of the proposed pandemic risk transfer solution is significant, being much larger than those proposed by government and industry so far.
As a reminder, there are two main proposals for pandemic risk backstops and facilities doing the rounds currently, the legislative proposal for a Pandemic Risk Insurance Act (PRIA) reinsurance backstop and the industry association-supported Business Continuity Protection Program (BCPP).
Chubb’s proposal takes elements from both, but calls for the mobilisation of much more capital, from public and private markets, and also provides an innovative looking way to trigger capital for small businesses, using parametric triggers.
Chubb explains the reason a public-private market approach to pandemic risk insurance and risk transfer is required:
Some risks can create losses so great that they are not insurable in the private insurance market without substantial government support, including catastrophic terrorism, nuclear accidents and pandemics. These catastrophic events can cause massive economic disruption as governments struggle, as they have in response to COVID–19, to provide efective and timely assistance through programs cobbled together after the disaster has struck. Not surprisingly, these ad hoc programs can lead to inefciencies, substantial delay and uncertainty, as well as real and perceived unfairness in aid distribution.
Chubb’s Pandemic Business Interruption Program includes two components, a $750 billion program for small businesses that provides an immediate cash infusion when a pandemic is declared and a $400 billion voluntary program for medium and large businesses with losses paid through the existing insurance industry claims process.
Both parts of the program require significant government backing Chubb believes, with the federal government proposed to take on a substantial percentage of the risk, via direct U.S. Treasury funding to insurers for the small business program, and through a newly created government–run reinsurance entity for medium and large business losses, which Chubb has dubbed Pandemic Re.
For small businesses, the Business Expense Insurance Program (BIP) is a parametric triggered scheme that would provide immediate cash funding injections on the declaration of a pandemic.
In the event of a government–declared pandemic and ensuing lockdown, insured businesses with 500 or fewer employees will receive a pre–determined payment based on a multiple of monthly payroll expenses. This simple (parametric) structure provides for an accelerated claims payment process.
Every P&C insurer currently writing business insurance would have to offer the program to small business clients and those declining the coverage would have to acknowledge they understand there is no pandemic coverage without it.
This would deliver certainty to businesses and also to the insurance and reinsurance industry, as how much pandemic business coverage was in place would be understood and legal action evaded.
Program capacity would float, according to government funding, Chubb proposes. But the insurer estimates an aggregate limit of $750 billion in two layers for the small business parametric pandemic product.
– The first layer is $250 billion with the industry’s share of $15 billion in year one, rising to $30 billion over the course of 20 years. Insurers handle payment of the insured amount, absorbing 6% of first–dollar claims up to a carrier’s market share of the $250 billion industry limit, rising to 12% over time. The government funds the balance up to the industry limit of $250 billion.
– The second layer is up to $500 billion excess of the $250 billion layer, which is 100% funded by the government.
Such a parametric source of risk transfer that was to be triggered by a declaration of a pandemic may be a risk transfer product the capital markets could look to support, which alongside government funding would help the re/insurance industry to be more secure in its offering, knowing the reinsurance is available via the capital markets.
The U.S. Treasury would need to set up a line of credit with insurance and reinsurance firms, the proposal states. But we’d like to think there could be a roll for the capital markets as well, given the parametric nature of this quick-funding contingent pandemic financing solution for smaller businesses.
For medium and larger businesses, Chubb proposes Pandemic Re.
This is a $400 billion layer of protection for businesses with more than 500 employees.
Pandemic Re would be a government reinsurance entity created for this specific purpose, with businesses and re/insurers able to participate on a voluntary basis.
Pandemic Re would be indemnity-based and importantly Chubb explains that “both the insurance industry and the government are paid an appropriate risk–adjusted price for pandemic cover.”
– The business interruption coverage would be written on modifed standard industry forms, providing payment for business expenses with a maximum payout of $50 million per policy.
– The total program capacity is $400 billion of aggregate limit. The industry share in year one is a maximum of $15 billion, rising to $30 billion in year 10 of the program.
– Insurers collect 100% of the premium, retain their proportional share and cede the balance to Pandemic Re for government share. Insurers pay claims, which are drawn down on Pandemic Re’s letter of credit for government share of loss.
– Government support through Pandemic Re is expected to stimulate development of additional private sector capacity above the current program.
That last line is key, as Chubb sees Pandemic Re not as a permanent way for the government to take what would be a growing burden, but rather it seems it sees it as a facility that could help to structure the risk better and thus encourage private market participation as well.
Again, this could include some capital markets solutions in time, if the right levels of risk-sharing with the government can be established and the right levels of risk appetite fed through a structured approach and solution.
Another important point of the plan is that Chubb envisages that over time “direct and secondary markets develop, ultimately lessening government pandemic burden” which also suggests an opportunity for other entrepreneurial sources of risk capital to play a supporting role as well.
Chubb’s proposal covers more bases than any other it seems so far and the inclusion of fast-paying parametric pandemic risk protection will certainly grab the attention of both the re/insurance market and the businesses that could be benefiting from the coverage if taken forwards.
Full details of Chubb’s proposal can be found here.