By Jeff Sistrunk

Law360 (November 19, 2020, 7:41 PM EST) -- Insurance industry representatives told a U.S. House panel on Thursday that the federal government should take a prominent role in helping to shield businesses from losses due to future pandemics, as the lawmakers weighed a proposed multibillion-dollar federal reinsurance program to back up insurers that offer pandemic coverage.

During a two-and-a-half-hour video hearing, the House Financial Services Committee's subcommittee on housing and insurance heard testimony from employees of several insurance companies and brokers, an insurance policy expert and a retail group representative on the proposed government-backed reinsurance program.

The reinsurance proposal, known as the Pandemic Risk Insurance Act of 2020, was introduced by Rep. Carolyn Maloney, D-N.Y., in May. It would create a backstop for insurers that offer policies with explicit coverage for policyholders' losses due to business interruptions attributed to an outbreak or pandemic that leads to a federal emergency declaration after Jan. 1, 2021. The proposal is modeled after the Terrorism Risk Insurance Act, which was passed in the wake of the Sept. 11 attacks and created a massive government reinsurance program for terrorism coverage.

On Thursday, the housing and insurance subcommittee's chairman, Rep. William Lacy Clay, D-Mo., queried Shelter Insurance Co.'s chief corporate counsel, Brian Kuhlmann, on whether TRIA can serve as a viable model for a pandemic backstop.

"Although the cost to insurers of a terrorism event is immense, the scale of a pandemic is even bigger," Clay said.

Kuhlmann, who testified on behalf of two prominent insurance trade groups — the American Property Casualty Insurance Association and the National Association of Mutual Insurance Companies — replied that TRIA is not an appropriate model for a pandemic reinsurance program because pandemics are much wider in scope than terrorism events.

"A terrorism risk is something that is localized, and the risk itself can be spread out throughout the country, while the claims would be localized to one certain region," he said. "A pandemic, on the other hand, is something that is occurring simultaneously throughout the country, with claims that would have to be paid out simultaneously throughout the country. It is just a very different risk."

Several lawmakers questioned whether any insurers would agree to offer pandemic-related coverage, even with a federal backstop in place. Under PRIA, participating insurers would collectively be responsible for covering the first $250 million of business interruption losses incurred by their policyholders. Once that industry-wide threshold is reached, a federal fund administered by the U.S. Treasury Department would cover 95% of additional losses up to $750 billion in a single year, with the remaining 5% spread among the insurers.

In response to a question from Rep. John Rose, R-Tenn., R.J. Lehmann, an executive editor and senior fellow at the International Center for Law and Economics, said he doesn't "imagine many traditional property and casualty insurers would be interested in participating" in a program like the one laid out in PRIA. He predicted that such a program would "largely be of interest" to "specialty operators," such as captive insurers and risk retention groups, that mainly serve individual companies or government entities.

"The administrative costs would be pretty large," Lehmann said. "There is not much of their own capital that is going to be contributed; they are only retaining 5%. If the $750 billion is exhausted, given the size of these events, they could be liable for money over that cap, and it is unclear how that would work out."

Kuhlmann, of Shelter Insurance, suggested at several points during the hearing that businesses' financial needs in future pandemics could be more efficiently met through an alternate proposal called the Business Continuity Protection Program, which was floated in May by APCIA, NAMIC and the Independent Insurance Agents & Brokers of America Inc. The BCPP, which would be a fully taxpayer-funded program, has not yet been introduced as legislation in Congress.

Under the proposal, companies would pay to participate in the BCPP, which would offer reimbursement of up to 80% of payroll, benefits and operating expenses for three months after a federal declaration of a public health emergency. The proposed program would be administered by the Federal Emergency Management Agency.

"Because [the BCPP] is a federal program and it would be subsidized by the federal government, there would be premiums that would be paid, but they would be affordable for small businesses and nonprofits throughout the country, and it would be delivered through the agency network that is currently out there and highly regulated by the states," Kuhlmann explained.

Some insurance companies and brokers do support some type of partnership between the federal government and the private insurance industry. John Doyle, president and CEO of insurance brokerage Marsh, told the House panel that a "public-private pandemic risk solution can instill confidence in businesses, accelerate our economic recovery and provide needed protection against future pandemics."

"A pandemic risk insurance program is essential for all of our policyholders, no matter their size," he said.

Michelle Melendez McLaughlin, chief underwriting officer of Chubb North America, touted her company's own proposal for a pandemic coverage partnership between private insurers and the federal government. Chubb's plan, which like the BCPP has not been introduced as legislation, would run for 20 years and consist of two layers.

The first layer would be a $250 billion pandemic coverage program for businesses with 500 employees or less, according to McLaughlin. Private insurers would agree to collectively pay 6% of policyholders' pandemic-related losses in the first year, while the government would pick up the tab for the remainder. The private insurers' share would gradually grow to 12% over the program's 20-year lifespan, according to McLaughlin.

The second layer would be funded solely by the government and would provide an estimated $500 billion in pandemic coverage for businesses with more than 500 employees, McLaughlin said.

"Our involvement in a public-private partnership with the federal government will lead to a better understanding of pandemic risk and incentivize and improve risk mitigation and preparedness," McLaughlin said. "A solution that commits insurance industry capital also provides an opportunity for increased risk-sharing over time as direct and secondary markets develop, thus reducing the government's financial burden in the future."

Maloney, the lawmaker who introduced the PRIA proposal, asserted during the hearing that "pandemic risk is insurable with an appropriate federal backstop." She emphasized that the current iteration of PRIA is a "draft, to be improved upon" and said she is "open to all suggestions."

Maloney asked Ann Cantrell, a Brooklyn-based small-business owner who testified on behalf of the National Retail Federation, what a program like PRIA would mean for Main Street.

"Every other store I see right now has a 'for rent' sign on it, so me and so many others would have so much hope and financial stability for the future," Cantrell said.

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