Pandemic Risk Insurance Act of 2020
- 1. © Centers for Better Insurance, LLC 2020 Version 1.0 Centers for Better Insurance (CBI) is an independent organization focused on supporting the insurance industry to optimize the value it delivers to all stakeholders (including policyholders, employees and society at large). CBI does so by making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators and policymakers. THE MATERIAL AS WELL AS ANY OTHER INFORMATION PROVIDED BY CBI IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS. CBI does not guarantee the accuracy or completeness of this material or any other information and may add, remove, discontinue, change, improve, or update this material or any other information without notice. Under no circumstances shall CBI be liable for any loss, damage, liability or expense claimed to result from use of this material or any other information. Centers for Better Insurance Policyholders Employees Shareholders Society Supporting value creation for all stakeholders through beneficial purpose, sound governance and effective controls www.betterins.org CBI-PAN-20-16 Summary and Key Risks Pandemic Risk Insurance Act of 2020 CBI
- 2. © Centers for Better Insurance, LLC 2020 Version 1.0 2www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society Pandemic Risk Insurance Act of 2020 Overview of the Proposal The Pandemic Risk Insurance Act of 2020 (HR 7011) uses a simplified version of the framework developed for the Terrorism Risk Insurance Act. This voluntary program would apply to declared public health emergencies between January 1, 2021 and December 31, 2027. Participating insurers must offer certain coverage for pandemics but the program would reimburse up to 95% of related losses. Pandemic Risk Reinsurance Program Make Available Requirement Mandatory Disclosures State licensed insurers (including domestic captives) may elect to participate in the program. A participating insurer must offer coverage for business interruption (including event cancellation) related to a covered public health emergency on the same terms, conditions and limits for which it offers coverage for business interruption not caused by a public health emergency. Participating insurers must disclose to policyholders: • The premium charged for business interruption losses subject to the program; • Information about the federal share of compensation; and • The existence of the $750 billion liability cap. As a practical matter, the make available requirement means a participating insurer will offer a policy without a specific exclusion of business interruption caused by a virus, pandemic or other health emergency. Treasury administers the program and pays claims against the federal backstop. DHHS has the authority to declare a “covered public health emergency” triggering the backstop.
- 3. © Centers for Better Insurance, LLC 2020 Version 1.0 3www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society Pandemic Risk Insurance Act of 2020 PRIA Backstop The total of all individual insurer deductibles is about $12 billion. Individual Insurer Deductible 5% of insurer’s prior year direct earned premium for most commercial property and casualty lines of business Federal Share 95% of insured losses above individual insurer deductible $750 billion Liability Cap Insurer Co-Share 5% of insured losses above individual insurer deductible Treasury may not make a payment under the program unless total insured losses from a declared public health emergency exceed $250 million. Program Trigger Liability Cap Neither insurers nor Treasury have any obligations above the liability cap. Claim payouts are pro-rated if it appears the cap may be reached. US Treasury would reimburse a participating insurer 95% of insured losses above the insurer’s backstop deductible. Deductibles may range from tens of thousands of dollars for captives to more than $650 million for large insurance groups. Treasury would not make any payments from the backstop unless insured losses from the pandemic exceed $250 million. The insurer deductible and liability cap are based on insured losses from all covered public health emergencies declared in any one calendar year.
- 4. © Centers for Better Insurance, LLC 2020 Version 1.0 4www.betterins.org Centers for Better Insurance Policyholders Employees Shareholders Society Pandemic Risk Insurance Act of 2020 Summary of Key Risks Risk Description While PRIA brings over many of the innovative features of TRIA, it also transposes a number of serious risks to the performance of the program. As with TRIA, PRIA would separate regular policyholders that must depend on traditional insurers and market forces for pandemic coverage from large corporates who can set up their own insurance companies to sell themselves lavish coverages at low cost. Risk Drivers Additional Information 1 Inadequate Coverage for Regular Policyholders 2 Captive Abuse by Privileged Corporates 3 Pass-Through Residual Market Disconnect 4 Non-Compliance with Mandatory Disclosures 5 Ineffective Offset for Duplicative Recoveries 6 Faulty Transition Mechanics Risk Consequences • Standard business interruption coverage wording would still require property damage • Insurers can reduce or eliminate civil authority coverage for all causes of loss Coverage required to be made available under the program fails to meet the needs of regular policyholders CBI-PAN-20-12 Large corporates use captive insurers to design, price and adjust claims under generous pandemic coverages free of from market forces PRIA becomes a mechanism to bailout large corporates without effective government oversight CBI-PAN-20-12 Captives (TRIA) Pass-through of pandemic losses to insurers from residual markets fails to consider insurers not participating in the program Non-participating insurers burdened with pandemic losses but no backstop relief Insurers fail to properly determine and disclosure pandemic premium Noncompliant insurers lose right to backstop recovery Compliance (TRIA) Double recoveries of federal aid by policyholders offset insurer backstop reimbursements Policyholders collect double while insurers lose backstop protection Duplicative Compensation (TRIA) Inconsistency with respect to effect and scope of nullification of exclusions for policies in- force on date of legislative enactment CBI-TRIA-20-03 Unclear or inconsistent coverages during first year of the program CBI-PAN-20-06