Fixing PRIA: Congress needs to address multiple issues before passing the bill

Times Square, already locked down and freakishly quiet, went dark last Wednesday to protest against the insurance industry. What for? Not paying out, of course. Specifically, businesses claimed they were sold business interruption insurance that wound up not paying out for a pandemic. The insurance industry responded that “pandemics are pretty much uninsurable, because you have everyone incurring loss at the same time.”

What the insurance industry really means is that pandemics require the mother of all insurance companies to step in — the Federal Government. And so the House is currently considering the Pandemic Risk Insurance Act (PRIA), crystallizing Paul Krugman’s observation that “the federal government is an insurance company with an army.”

Understanding the Pandemic Risk Insurance Act (PRIA)

PRIA is the Federal Government’s proposal to backstop the insurance market for business interruption insurance. This includes losses “resulting from periods of suspended business operations, including losses from a covered public health emergency, or a civil order related to a covered public health emergency.” This is important because most of the business interruption insurance currently held by a third of US businesses excludes pandemic-related closures.

PRIA is similar in structure (and in name) to the Terrorism Risk Insurance Act (TRIA) first passed in 2002. TRIA provides a federal backstop to insurance losses stemming from terrorist acts. Insurers who opt-in to the program must issue policies that cover business interruption losses due to pandemics to take part. PRIA would kick in when certain conditions are met:

1. A “covered public health emergency” is declared. This is defined as any outbreak of “infectious disease or pandemic” for which an emergency is declared, on or after Jan 1, 2021 under the Public Health Service Act and certified by the Secretary of Health and Human Services.

2. This emergency results in at least $250 million of losses for the insurance industry.

After these requirements are met, insurers would be responsible for a deductible calculated at their 5% of their Direct Earned Premium for the prior year. After the deductible is paid, the Federal Government then covers 95% of the insurer’s losses, up to an annual cap of $750 billion.

The annual cap is too low

PRIA mandates that all policyholders have the cap figure “conspicuously disclosed” when they purchase policies reinsured by the act. This is similar in structure and mechanics to the $100 billion annual cap for TRIA, which is also subject to disclosure requirements. The adequacy of these caps can only be assessed with reference to the underlying risk.

9/11 cost US insurers approximately $47 billion in 2019 dollars and there has never been a single payout under TRIA. So a $100 billion annual cap for terrorism seems entirely reasonable. But according to Chubb CEO Evan G. Greenberg, the cost of business interruption losses due to coronavirus shutdowns could exceed $430 billion a month.

To be truly effective against a future pandemic, potentially one more deadly and contagious than COVID-19, the cap should be many times larger. By the standard set by TRIA, the cap should be 2x a major event. If we assume a major pandemic will have three months of shutdown at $430 billion a month ($1.3 trillion) and then provide similar 2x headroom, the program should have an annual cap of at least $2.6 trillion. Another way of saying this is that based on the data we have for COVID-19 (and there are worse pathogens), the cap proposed will cover less than 30% of the losses experienced due to future outbreaks.

Ultimately, it will be businesses that suffer, not the insurers, who will simply point to the policy disclosure and shrug.

Payouts should be facilitated by tech

The Achilles’ heel of PRIA is that it relies on the traditional, barnacle-encrusted claims process. Under the act, insurers process and pay claims in the traditional manner, which is to say, really, really slowly in the best of times. And a pandemic will not be the best of times. Particularly not a future one where many businesses have PRIA-backed business interruption insurance. This may make traditional claims processing simply unworkable.

Insurance companies generally keep only enough claims processing capacity available to service day-to-day claims volume. Now imagine a scenario — the exact reason for PRIA in the first place — where the entire country shuts down at the same time. Every insured business will file a claim at the same time. Insurers will be overwhelmed. In addition, the traditional insurance claims process relies on people, many of whom won’t be able or willing to work. A massive spike in demand coupled with less claims capacity will lead to a lot of delays just when businesses need claims paid quickly so they can retain staff and prevent bankruptcy. There is nothing in the act that will address this fundamental issue.

There are ways for insurance companies to make payments programmatically, without any human intervention. A parametric trigger is the official term for this type of programmatic payment, and it’s already being used for earthquake insurance and similar catastrophic losses. But any insurance entity that dared to make parametric payouts instantly on closure would have to be willing to go it alone. There would be no way to predict that all the government’s criteria would be met before the payments would need to be made.

This leaves a substantial gap in the market for businesses that want to be paid quickly while their larger claims are being processed. A low-limit instant payment when a business is shut due to a pandemic complements traditional business interruption policies. This would be similar to the market AFLAC has created for such supplemental coverage in the health insurance market.

Too little, too late

Perhaps most importantly, this legislation will not cover a second wave of COVID-19. Businesses who currently hold policies and are hoping for their claims to be paid will not get any help from PRIA. Neither will insurers. The act is explicitly not retroactive, stating it “may not be construed to affect any policy for business interruption insurance in force on the date of the enactment of this Act.”

PRIA is a forward-looking solution for the next pandemic. And although that’s important, it may be several years before we see another event on the scale of coronavirus, and even then one might argue the experience and preparedness we’ve collectively gained will mean fewer total shutdowns of businesses the next time around (though the next virus could be worse).

What you can do

PRIA is a good start and a step in the right direction, but it doesn’t address the elephant in the room: how to address business interruption from COVID-19. The program should be put in line with terrorism, making the provision of coverage a national duty for any US-based insurance entity. This will give the government more flexibility to raise the cap to several trillion dollars. In addition, the act should offer incentives for insurers who offer instant parametric payouts to businesses closed due to government orders. This would help restore faith in both the insurance industry and the government’s support of business, particularly small business.

Pandemics are now the number one threat to the existence of small businesses in the United States. Absent some effective means of insurance, it will be very hard for non-essential small businesses to get started or continue to operate. Sometimes, we need the government’s army to protect us. This time we need its insurance company. Please consider writing your congressional representatives to help draw attention to the areas PRIA could be improved, to help save small businesses across the country.

Jay Bregman is the CEO and co-founder of Thimble, an insurance tech startup backed by IAC.

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