Creating the ultimate cover for COVID-19 losses — and beyond

“We have on the sidelines highly experienced and skilled catastrophe response professionals, systems and methodologies which are used for earthquakes, hurricanes, wildfires and those kinds of responses. They are not being deployed today for COVID-19.” Jason Schupp, founder of thinktank Centers for Better Insurance (CBI).

· Large stimulus payouts backed by governments 'inefficient'
· Insurers could help unblock payment bottlenecks in government programmes
· Tailored insurer-led scheme risks 'haves and have-nots'
· Future-proofed cover looks beyond pandemic shutdown

As warnings about the threat of enforced retroactive business interruption cover continue to ring out, one thinktank chief suggests that insurers should actually be much more involved in the process, not less.

Part of the problem, he argues, is that the industry doesn’t have a clear role in the pandemic response.

Jason Schupp, the founder of thinktank Centers for Better Insurance (CBI), says that the September 11, 2001 terrorist attacks presented a similar situation for insurers.

“The insurance industry struggled to deal with a newly recognised exposure, and out of that came the Terrorism Risk Insurance Act (TRIA).

“Now we’re dealing with another perhaps not fully understood or previously experienced exposure, and what we see is an immediate look over at the TRIA as a jumping off point.”

However, says Schupp, who has worked in insurance for decades, including 21 years at Zurich, using TRIA as a foundation is challenging, partly because there are some important differences between this pandemic and the 9/11 attacks. One major difference is that TRIA was not intended to cover everyone, whereas pandemic cover would have a huge reach, affecting millions and creating a huge administration task.

There is another, potentially better, alternative to a fundamentally TRIA-based programme, he says. It has its beginnings in comparing two pandemic support programmes for the US: the government-funded Paycheck Protection Program (PPP) launched on April 3, 2020, and a hypothetical Pandemic Risk Insurance Act (PRIA) based on TRIA.

Schupp explains that the speculative PRIA model would provide a federal backstop, serving as a kind of reinsurance to reimburse insurers for a share of losses.

He argues that by taking the best insights from programmes such as PPP and PRIA, insurers could help build an ultimate pandemic cover solution with tailored benefits that could also help defuse the threat of retroactive business interruption payments.

The right tool for the job

What’s wrong with the current situation? Schupp says that huge government stimulus packages that help brace the economy, such as the $3 trillion fund in the US, are far from perfect. The way payments are doled out under PPP is inefficient and is also, some would argue, overly generous.

Large payouts need to be backed by governments, he agrees, but points out that as part of the inefficiency and scale of demand, payment bottlenecks are being created.

Insurers are experts in efficiently matching payments to actual loss and administering the process, so they have a positive role to play here. Yet, for the most part, they are on the outside looking in.

“We have on the sidelines highly experienced and skilled catastrophe response professionals, systems and methodologies which are used for earthquakes, hurricanes, wildfires and those kinds of responses. They are not being deployed today for COVID-19,” Schupp says.

He argues that by taking the best of PPP and PRIA to create a new form of cover, insurance expertise could be successfully married with the financial clout of governments.

“I wanted to explore that by comparing the experience we’re currently going through on PPP that has nothing to do with the insurance industry (with a PRIA programme). PPP is being run through the banks but it provides a benefit which is somewhat analogous to business income or business interruption loss coverage,” he explains.

“So rather than simply think about PRIA in isolation, let’s look at how it would perform or interact in the context we’re seeing play out in the PPP.”

PPP and PRIA pros and cons

With PPP, the benefits available to claimants are very generous when compared to normal insurance business income coverage. PPP claimants can receive two months of payroll from the US federal government, Schupp says, which is essentially a grant if you assume the loan is eventually written off. On top of that, PPP payouts include businesses that continue to employ their employees in a revenue-earning capacity.

“In other words, if you have a convenience store that is open 24/7 and has a high volume of business because people need to go there for their groceries, that employer can still apply and receive a pay grant, effectively, for two months of payroll even though those employees continue to be employed and are productive from a revenue-oriented standpoint.

“That would not be compensable under an insurance policy as there would not be any sort of a loss there,” he says.
PPP is not so much reimbursing loss but is instead reinforcing the economy. “They’re taking a fairly large amount of money and spreading it around, not necessarily matching that money to actual loss.”

When it comes to defining a loss and matching compensation to that, insurers are the experts. And Schupp says it’s important to think about who defines the benefits that can be claimed. For example, under a PRIA framework the insurance company defines the benefit through its insurance policy and as a result it will not compensate any more than the actual loss.

“The advantage of an insurance-based mechanism, such as PRIA, is that it’s going to match the loss, so it’s probably going to be cheaper because you’re only going to compensate for loss. You can probably predict or define what the benefit is going to be in advance as payable in the event of a loss, whereas what we see the current need or mindset around PPP is much more of an economic bailout.”

However, a PRIA framework would depend on traditional insurance ideas of what is compensable, so it is going to be narrower than would be seen in a publicly funded policy response.

“The advantage of PRIA would be a more tailored benefit, which corresponds more to what businesses actually lose. But that may fall short of an economic stimulus or promoting a larger economic recovery,” he says.

Added to this, when insurers define the benefits it can create a different issue, Schupp adds.

“What we saw under TRIA is that small and mid-size businesses tend to have a fairly narrow scope of coverage, whereas the larger businesses tend to have broad, sometimes extraordinarily broad, levels of coverage.

“So you have a little bit of the haves and the have-nots when the insurance industry is the one that has the free hand to tailor the benefits.”

Problem solving

Part of the reason the insurance industry is on the sidelines when it comes to covering pandemics, according to Schupp, is because it “stepped out” of this coverage about 15 years ago. He is referring to the insurance industry in general choosing to exclude pandemic exposure from cover. As a result it stopped defining the benefit that would potentially cover risks such as today’s COVID-19 impact.

“You may find some policies here and there that cover pandemic—epidemic, viruses, bacteria—but in the main, you won’t, those are excluded. So they’re not engaged now because they stepped out,” he says.

One of the reasons for this is that demand for pandemic cover was not there, despite high profile outbreaks at the time.

However, Schupp says: “Another question to ask is ‘what happens when the whole insurance industry steps out?’.

“At the time, policymakers and society should have asked ‘how are we going to respond to a foreseeable catastrophic risk, when our normal response mechanism, which is insurance, is not available?’. That conversation never happened, but it’s happening now.”

It’s surprising that there wasn’t a bigger debate given it was around the time of the 2003 multi-country SARS outbreak, the 2003/04 Ebola crisis and the 2005 H5N1 Avian ’flu scare. Now the industry and governments need to come back together to create a better solution, Schupp says.

He explains that he is working through some different concepts. “It’s quite challenging because we don’t have a load of data; we’re learning as we go along.”

He says one lesson they’ve already learned in the US is that a lot of decisions that affect payouts are happening at the state level—for example, whether, when, and to what extent a state gets shut down in response to a pandemic/epidemic.

“With this in mind, do we need to have solutions that are more responsive and flexible at the state level to match the decision-makers who are creating this loss by telling businesses to shut down?” he asks.

The decisions are for the common good, but shutdowns and quarantines tend to be a more local decision.

“I am not suggesting that individual US states have the money to fund that solution, but it is worth considering whether this should be a completely federal programme or there should be greater input at individual state level in trying to craft an appropriate solution in cooperation, with financing from the federal government,” he says.

Schupp points to the shortcomings of how benefits are defined under PPP and the hypothetical PRIA.

“Benefits that have been defined under PPP are like a shotgun, throwing stuff out everywhere. They’re not terribly efficient, it’s geared more towards the entirety of the economy, whereas insurance benefits are probably too complicated to administer—they are possibly too narrow in some regards and too broad in others,” he says.

His solution is for insurers and public policy professionals to discuss what benefits should be pre-planned and what the triggering event should be.

For example, using PPP as a reference point, it’s fair to say that dealing with $350 billion of claims is far more than anything the insurance industry is probably capable of, although it does need to be capable of dealing with a $100 billion a year loss under its commitments to TRIA, Schupp argues.

“Right now, insurers are basically executing on zero, so there’s probably some kind of a middle point where maybe they’re not dealing with $350 billion of claims but, for example, they can take on small businesses and administer to them immediately, or somehow help to alleviate the current bottleneck, where claimants are struggling to get money out of the federal government, even though it’s all sitting there.

“That’s more of a blank sheet of paper exercise, where we say ‘we’ll borrow from this programme or borrow from that’, because we see two programmes here and challenges with regard to both.”

Beyond pandemic shutdowns

By drawing on the current experience in the US there’s an opportunity to build cover that is future-proofed. It focuses on what the idea of loss is based on, for example a loss which is the result of an order from a state government to shut down non-essential business.

“There’s a pandemic behind the current shutdown, but the real answer to the question ‘why is the restaurant not open?’ is that it is because the government told it to close,” Schupp says.

“The business was told to close because of the pandemic today, but it could be for some other reason tomorrow, whether that is extreme weather, an industrial accident, because the internet or the grid goes down, or we have social unrest.”

He says it would be short-sighted for a new solution to focus only on the pandemic risk, when the risk we should be focused on is the risk that a state government needs to shut down non-essential businesses.

“You won’t even know what those risks are until they happen. Then we’re going to be chasing ourselves and thinking ‘gosh, too bad this wasn’t a pandemic because we had a solution for that’,” he explains.

Returning to the example of terrorism cover, Schupp says it took more than a year after 9/11 for TRIA to be enacted.

“It takes time. You need to understand what you went through, you need to sort through what the dynamics were and have a robust debate about the solution.

“For 9/11 the industry rolled up their sleeves, they jumped in. It doesn’t feel that way now.” Schupp questions whether the industry will be able to extract all the insights and learnings for this pandemic as they did from 9/11 when they’ve largely not been involved and have not had the engagement in managing COVID-19 claims.

But he adds: “I do think we’re going to go through a period of time collectively learning, and I hope we take the time, before we jump into a solution, to fully understand the problem we’re trying to solve.”