PRIA bill introduced with Pandemic Risk Reinsurance Program

H.R. 7011, or the Pandemic Risk Insurance Act of 2020, has been introduced by politicians and industry leaders including insurance and reinsurance market representatives and proposes the creation of a Pandemic Risk Reinsurance Program to compensate for business interruption caused by future pandemics.

The bill has been in the works for a number of weeks and sees legislators borrowing from concepts adopted for the Terrorism Risk Insurance Act (TRIA) and Terrorism Risk Insurance Program (TRIP), to create a Federal pandemic risk reinsurance backstop.

The legislation is designed to create the Pandemic Risk Reinsurance Program, which would enable a “system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”

Introduced by Congresswoman Carolyn B. Maloney (D-NY), senior member of the House Financial Services Committee, the PRIA bill has a goal of enabling insurers to provide business interruption coverage and creating the Federally funded pandemic reinsurance backstop to support them.

“Like the Terrorism Risk Insurance Act (TRIA), the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry,” the introducer explained.

“Millions of small businesses, nonprofits, mom-and-pop shops, retailers, and other businesses are being left out in cold and will never be able to financially recover from the coronavirus crisis because their businesses interruption insurance excludes pandemics,” Congresswoman Maloney said. “We cannot allow this to happen again. These employers and their employees need to know that they will be protected from future pandemics, which is why I am introducing the Pandemic Risk Insurance Act.”

The bill authorises the creation of the Pandemic Risk Reinsurance Program (PRRP) which could be triggered once aggregate insured losses from a public health emergency exceed $250 million.

After the triggering of PRRP, the Federal share of compensation would be equal to 95% of insured losses that exceed the insurer’s deductible, while each participating insurer’s deductible would be set at 5% of the value of the insurer’s direct earned premiums during the preceding calendar year.

The PRRP would have a reinsurance cap at $750 billion of Federal compensation, beyond which the Treasury Secretary can determine the pro-rata share of compensation.

The program would not stop insurers from buying private market reinsurance to add further financial support.

Unlike other recent disaster and natural catastrophe related bills that have made it to the legislative, the PRIA bill text does not include any discussion of transferring risk from the program itself to private markets to support it and reduce the potential taxpayer burden.

This is perhaps a little surprising, given their have been efforts to ensure that all Federal programs can acquire their own reinsurance or retrocession, including through alternative means or via the capital markets using insurance-linked securities (ILS) instruments.

Yes, PRIA is big, at running up to $750 billion of compensation. But not including text to allow for private market transfer of some of the risk it bears may be considered an oversight, given it’s almost certain to be raised in discussions of the bill.

So now there are (at least) two formal proposals for a pandemic risk bearing solution, the newly introduced Pandemic Risk Insurance Act of 2020 bill and legislation, and also the insurance industry association supported Business Continuity Protection Program (BCPP).

One fundamental difference is that PRIA supposes the insurability and indeed reinsurability of pandemic risks, where as the BCPP explicitly says that a PRIA model “does not square with the fundamental notion that pandemics are not insurable risks.”

But industry back PRIA as well, in the form of named endorsers including insurance and reinsurance brokerage owner Marsh & McLennan Companies, association The Council of Insurance Agents & Brokers, RIMS and the Risk Management Society.

So opposing views coming out of industry as well, with the fundamental difference seemingly that one approach assumes the insurability of pandemic risks to a degree, while the other says they are not insurable.

But at the same time the industry is offering pandemic coverage and explicit coverage has always been a feature of the market, albeit with caveats and often featuring a raft of exclusions.

But that suggests insurability and pandemics can perhaps be made even more insurable if sufficient reinsurance capacity, structured in the right way, is sitting behind the front-end protection products.

But PRIA is basically a Federal backstop to help the insurance industry provide more pandemic coverage and pay more pandemic related claims.

After PRIA exhausts, at $750 billion of Federal compensation, what happens next? More Federal funding and money printing, would likely be the only option.

Perhaps something in the middle, with a Federally funded Pandemic Risk Reinsurance Program that itself accesses private market retrocession to ultimately share risks back to the industry participants able to bear them, or to the capital markets, could extend the protection of such a program beyond where the current proposal sits.

It’s often been debated that TRIA should be reinsured into the private market, or the private market allowed to provide retrocessional reinsurance protection to support the ability of the insurance industry to meet terrorism claims.

The same could be construed for pandemic risks and we understand some efforts are underway to discuss backstops with more private market risk sharing involvement as well, adding to the solutions being discussed in legislative circles.

The capital markets could bear some of this pandemic risk, at a price of course. The catastrophe bond structure is a viable risk transfer and securitisation structure to take pandemic risk and hedge some of the exposure any PRIA, PRRP or indeed BCPP pandemic risk program carries into the broader capital markets.

With a globally impactful, peak peril like pandemic risk, finding a way to bring together the innovation of the insurance and reinsurance market, with Federal support and the depth and liquidity of capital markets, may provide a more holistic solution that puts less burden on taxpayers and enables governments to bear their share of the risk more viably.

Which solution will be successful remains to be seen, but the passage of PRIA and the Pandemic Risk Reinsurance Program is going to be interesting to watch, particularly as there have been recent legislative efforts in the U.S. to always ensure that Federal disaster programs have the option of transferring some of the risk within the text of the bills.

Support is strong for the PRIA bill introduction.

“Nonprofits in New York have lost countless millions of dollars in revenue, thousands of staff, and even shut down due to the COVID-19 pandemic, and nonprofits are consistently denied insurance claims for these losses. None of us know when this pandemic will end or when another will begin,” commented Chai Jindasurat, Policy Director at Nonprofit New York, an association of over 1,500 nonprofits. “Congresswoman Maloney’s Pandemic Risk Insurance Act is a proactive, market-friendly insurance solution to fund and cover future business losses that will create much-needed stability for our economy and our communities.”

“9/11 exposed the need for terrorism risk insurance, and since the impact of coronavirus on the travel industry has been nine times that of 9/11, it is very sensible to offer a similar backstop for pandemics,” added Tori Emerson Barnes, U.S. Travel Association Executive Vice President for Public Affairs and Policy. “This measure will go a long way in giving businesses the confidence they need to reopen, which will be vital to a rapid, robust and sustained economic recovery. Congresswoman Maloney and the other co-sponsors of PRIA deserve enormous credit for initiating this crucial step to restore American jobs and put the country back on the road to prosperity.”

“Congress must take swift action and begin contemplating a solution to provide all businesses protection against future pandemic risks,” Leon Buck, National Retail Federation Vice President for Government Relations, Banking and Financial Services explained. “The development of a public-private partnership to address this risk will provide certainty for businesses and organizations of all sizes and will ensure that we can meet future pandemic events with greater reliance. Not every pandemic will have worldwide impact, but when and where one occurs it is likely to result in a nearly total cessation of business. This legislation is the cornerstone of a proactive approach in managing the risk and impact of a pandemic or epidemic in the future.”

“The Pandemic Risk Insurance Act offers a critical solution for associations and others devastated by event cancellations, slashed reserves and sharp membership declines amid COVID-19,” said Susan Robertson, CAE; American Society of Association Executives President and CEO. “ASAE thanks and applauds Congresswoman Maloney for introducing this important bill, which will no doubt help provide America’s 62,000 associations the security they need to fully reignite our community’s far-reaching economic impact through industry-focused conferences, workforce development and educational programming, among other critical services.”