The thorny question of how insurers can help businesses though the next global pandemic has opened a split within the US insurance industry — with one side claiming that pandemics are uninsurable and the other arguing that, given a government backstop, private capital has a key role.
This rift deepened this week as Chubb, the $58bn-in-market capitalisation insurer led by Evan Greenberg, set out a plan for a public-private partnership to provide pandemic cover, even as industry bodies pursue a campaign to have the government cover all future liabilities.
Many business owners were surprised to discover that business interruption policies do not cover pandemics, and some have responded by suing their insurers.
“The basic fact is that pandemic risk is not insurable,” said Jimi Grande, head of government affairs at the National Association of Mutual Insurance Companies. “It is not a traditional risk pool — it is a loss to the entire pool every time.”
The NAMIC and other trade organisations say that because the costs of a pandemic are so large and widespread, insurance cannot diversify them away.
While few individual companies have taken this position publicly, industry insiders say it has deep support.
“Insurers are in the business of managing and diversifying risk, but insurers cannot responsibly spread the cost of a nationwide or global pandemic,” said David Sampson, chief executive of the American Property Casualty Insurance Association. “We cannot commit capital when it is impossible to model, price or diversify the risk.”
The APCIA and NAMIC, the two largest industry associations, have proposed that industry provide only administrative support while governments bear the entirety of the risk.
However, a small number of companies — most prominently Chubb and its chief executive, Mr Greenberg — argue that if the government provides a backstop, the industry can do more.
“I believe the industry can take [pandemic] risk,” Mr Greenberg told the Financial Times. Referring to the trade body proposal, he said: “I think it belittles the industry. We have a more vital role to play, and we can take risk, if it is a defined limit of risk.”
The divergent positions are being staked out as US lawmakers begin to consider ways to expand the availability of business interruption insurance to cover pandemics. The crafting of legislation is, in part, a negotiation over how much risk would be covered by the private sector and how much by government.
Late on Wednesday, Chubb released a proposal for a public-private pandemic insurance partnership that would provide small businesses hit by pandemics with a fast, fixed payment based on a multiple of their payroll expenses, while larger businesses would have coverage resembling traditional business interruption insurance.
Insurers would pick up the first losses and the government would be responsible for the remainder. In all, the industry would have maximum pandemic exposure of between $30bn and $60bn, while the government’s exposure would be capped at about $1.1tn, according to Chubb.
That contrasts with a $750bn cap on the government’s liability proposed in a pandemic insurance bill introduced in the House of Representatives by Carolyn Maloney, a Democrat, which has not won any industry backing. Under the proposed Pandemic Risk Insurance Act (Pria) — which is modelled on the federal terrorism risk insurance programme — insurers would take the first losses with the government providing a backstop.
A similar debate is playing out in the UK, where senior insurance industry executives are drafting plans to enlarge the government-backed terrorism insurance scheme, Pool Re, to include pandemic coverage as well.
Mr Greenberg and Chubb are not entirely alone in the US in arguing the industry has a role to play. “Many insurers do possess the risk management and operational expertise to administer a programme such as the one laid out in Chubb’s framework,” said Jeff Dailey, chief executive of Farmers Insurance Group, a California-based subsidiary of Zurich Insurance Group.
John Doyle, chief executive of the insurance broker Marsh, also called the Chubb plan “a significant step forward in creating a public-private solution”.
Mr Greenberg pitched the Chubb proposal as superior to Pria, the congressional proposal. Under Pria, unlike the Chubb plan, there is no absolute dollar limit to insurers’ liabilities and insurers are not required to participate. The Chubb plan requires all commercial insurers to offer small-business pandemic coverage.
“Pria discourages insurance carrier participation because the [risk] retention by carrier is too great [and] the premium carriers can charge for coverage is inadequate relative to the risk,” Mr Greenberg said.
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