The U.S. House Financial Services Committee, which oversees and makes recommendations on legislation relating to financial services including insurance, has called for the passing of a Pandemic Risk Insurance Act (PRIA).
The idea is to provide a reinsurance backstop to cover losses to the insurance sector from future pandemic outbreaks like the ongoing Covid-19 coronavirus crisis.
Taking a leaf out of the experience gained from the Terrorism Risk Insurance Act (TRIA), the Committee wants to encourage the government to look to how best to provide support to the insurance sector for pandemic risk.
The Covid-19 coronavirus pandemic has heightened awareness of the need for pandemic insurance and in particular coverage for businesses when pandemics threaten shutdowns, as we’re now seeing.
As a result, legal efforts to establish reinsurance facilities to support the insurance industry are one way to try and secure this important area of the economy.
Chair of the Committee, Congresswoman Maxine Waters (D-CA), explained the reasoning behind the call, “The circumstances we are facing are unprecedented and will require creative approaches. The response should not include financial deregulation; regulators must not roll back the safeguards that have been put in place to protect the financial system and economy. In fact, this crisis has demonstrated that the safeguards Democrats enacted as part of the Dodd-Frank Act are working. By requiring higher capital and liquidity buffers, banks are well-positioned to continue lending and play an important countercyclical role. However, America’s consumers, small businesses, and vulnerable populations are suffering. It is time for a policy and fiscal response to address their needs.”
The request for a reinsurance backstop actually came from the U.S. National Retail Federation, which is concerned that its members are largely unable to claim on business interruption coverage in the current crisis as their policies did not cover pandemics.
There are numerous legal efforts to force insurers to pay pandemic related business interruption claims, with ideas floating around Congress and the legislative around how they could support these retailers and other business owners at a time when many have had to shutter and close down operations.
But forcing the insurance industry to pay up is not the answer, as the impact on insurers and their reinsurance capital providers could be enormous.
Therefore, any effort to have Covid-19 coronavirus business interruption claims honoured by the industry must come with an idea of a way to backstop the sector as well.
PRIA, a pandemic risk reinsurance pooling facility, could be one way to do this. Although for it to really work it would require that pool to be funded at least partially by the government, given the scale of the economic impact we now see is possible.
The proposed PRIA would work by capping the total insurance industry losses that companies would face from a pandemic event, with the reinsurance provisions kicking in to support claims above that level.
No detail is yet available on any specific plans for a pandemic Pandemic Risk Insurance Act (PRIA), it’s in the very early stages, but it’s likely that any work to legislate for one would also include a discussion of the use of capital markets as part of the reinsurance mechanism behind it.
In addition and showing that lawmakers are learning fast from the current coronavirus pandemic, the Committee also calls for there to be measures in place to mandate public companies disclose their exposure to pandemic risks and also to supply chain disruption.
Similar to continuing efforts to make climate risk disclosure mandatory, this would mean companies had to openly expose the huge financial costs they could be on the hook for if a repeat of this coronavirus outbreak were to occur.
That would be positive for the insurance and reinsurance industry, as it is often only after risks are measured and their magnitude disclosed that companies begin to purchase the necessary levels of protection they really need.