Insurers Faces Off with Congress Over Pandemic Coverage

May 21, 2020
In The News

Insurers unveiled a proposal on Thursday that calls for the federal government to compensate businesses hurt by future viral outbreaks, the latest attempt by the industry to fend off pressure from lawmakers to offer coverage for pandemics.

The plan is a counterproposal to legislation that Rep. Carolyn Maloney (D-N.Y.) will introduce this week that would encourage insurers to sell pandemic coverage in business interruption insurance policies by creating a federal backstop that would help pay for losses. Today, insurers often exclude viruses in the business policies, and the industry is facing a wave of litigation after rejecting claims from employers forced to shut down since March.

The industry's major trade groups in Washington — the National Association of Mutual Insurance Companies and the American Property Casualty Insurance Association — argue that the vast economic toll of pandemics makes them uninsurable. In their new plan with the Independent Insurance Agents & Brokers of America, they say businesses should instead buy financial protection for future outbreaks from the federal government, which would then be responsible for making payments to help replace lost revenue.

The industry proposal is a recognition that some form of permanent government intervention to keep businesses alive during future pandemics is inevitable and there is a strong possibility insurers will be forced to participate in the solution.

"I don't like the idea honestly of the insurance industry coming up with anything," said Jimi Grande, senior vice president of government affairs at the National Association of Mutual Insurance Companies. "It makes it feel like it's an insurance industry problem, and it's not. We just happen to be the people who understand risk better than anybody else."

The emerging debate is one of the first attempts by Washington to plot ways to make the economy more resilient from future viral flare-ups, even as most policymakers are focused on emergency measures to keep Americans financially afloat in the coming weeks.

Driving the discussion is Maloney, the New York Democrat who chairs the House Oversight Committee and serves as a senior member of the Financial Services Committee. This week she plans to introduce legislation that would try to spur a market for pandemic insurance akin to the way the government made sure terrorism insurance was available after the Sept. 11, 2001, attacks. Congress created that program in 2002 to address fears that businesses wouldn't be able to acquire terrorism coverage — sometimes required by lenders — as insurers pulled back.

Similar to the model of the terrorism program, Maloney's proposal would have insurers offer pandemic coverage in exchange for the government agreeing to cover a portion of their potential losses. The Treasury Department would step in to pay once the industry suffered a $250 million hit. The government would then be able to help cover up to $750 billion in losses per year. The program would be voluntary for insurers, though they would be required to offer pandemic protection in their policies if they chose to participate.

"An ounce of prevention is worth a pound of cure," said Maloney in a letter this week asking House members to support her bill. "Like the Terrorism Risk Insurance Act, the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry."

The proposal, which is expected to have support from the Retail Industry Leaders Association, the National Retail Federation and other business groups, has divided the insurance industry.

Insurance carriers have warned that the cost of covering pandemics, even with a government backstop, is too much for their balance sheets to handle and could threaten the solvency of the industry.

But insurance brokers counter that a government-backed pandemic insurance market is viable. Among the supporters of Maloney's bill are the Council of Insurance Agents and Brokers and insurance brokerage Marsh & McLennan, which has been a key player lobbying for a new public-private program.

“Some insurers underwrite pandemic risk today and have for many years," said Marsh President and CEO John Doyle. "Aggregation is the primary challenge with regards to pandemic risk and it’s why we need a government backstop. But the insurance industry also has a role to play in mitigating the risk of the next pandemic event.”

But insurance underwriters and agents that would be responsible for delivering the coverage are resisting Maloney's plan. Starting this week, they plan to push for an alternative that would take them almost completely out of the solution of protecting ailing businesses during the next outbreak.

The alternative plan being pitched by insurance trade groups has more in common with the National Flood Insurance Program, which Congress created to provide homeowners with a financial safeguard against flooding — another complicated, devastating risk that insurers were reticent to cover.

The industry plan would establish a so-called Business Continuity Protection Program under the Federal Emergency Management Agency. FEMA also runs the flood insurance program and other disaster response efforts.

Businesses would pay into the program, and in the event of a public health emergency, they would be able to receive payments that would cover up to 80 percent of their payroll and other expenses for three months. Insurers would only act as middlemen through which businesses would purchase the future government aid.

Supporters of the plan argue that it's a better mechanism than insurance policies for keeping businesses alive during the next pandemic. Insurers and the proposal's backers say that insurers would likely offer pandemic policies that gave businesses an incentive to stay open as long as possible, rather than shutting down and getting payouts during the emergency, and that insurers might not offer coverage for as long of a duration.

"Risk-based insurance is structured to discourage claims, control costs and charge higher rates to businesses most likely to make a claim," said R.J. Lehmann, a director at the R Street think tank, who advised the insurance trade groups on the plan. "But the principles of public health dictate that those businesses — the ones that could serve as vectors of transmission — are the ones we most want to have incentive to shut down and not to lobby their local officials to avoid a shutdown."

The Maloney and industry plans are prospective and wouldn't force insurers to pay out for the current coronavirus pandemic. Insurers have pitched a separate "recovery" fund that would have the government make payments to businesses hurt by the Covid-19 shutdown. The Trump administration, a host of lawmakers and state insurance regulators have warned against measures that would have insurers retroactively pay for claims that weren't covered heading into the pandemic.

The back-and-forth is likely to take months to be resolved as Congress shifts its focus to ways to shield the economy from another outbreak. Maloney's bill has kickstarted the debate, but it's likely to change as policymakers try to forge a compromise with the industry.

"Our belief is the only way to get them to actually show their hand and say, 'This is what we can do' is to begin the conversation," said a senior House Democratic aide. "Stop telling us what's wrong and why this conversation shouldn't happen at all."