The magnitude of the COVID-19 pandemic’s financial and social impacts has exposed significant shortcomings and vulnerabilities in our country’s preparedness for and resilience to systemic catastrophic events of this scale and nature. This includes coverage gaps in insurance protection for losses from business interruption occurring arguably in the absence of “physical damage” to the business location. Equally important, coverage gaps for the pandemic risk have also been revealed or developed as a result of this year’s crisis in other lines of insurance, including event cancellation, film & TV production package, general liability, and employment practices liability insurance. The crisis has also put stress on workers compensation insurance.
Although overshadowed for the moment by other effects of the pandemic, if not remedied, these insurance gaps will hinder any recovery, especially impacting business lending, new leasing activity, retail and hospitality, housing construction and development, as well as media production. Private insurance alone cannot and will not remedy the gaps -- at least not in the short-term -- but private insurers need to be part of the solution. What is urgently needed is a federally-backstopped availability mechanism similar to the highly successful one which Congress put in place for terrorism following 9/11-- in short, a TRIA-style program for pandemic risk.
Impacted lines of insurance need to be supported with both a “make-available” mandate and a robust federal backstop for the private insurers making the insurance available. During at least a five-year economic recovery period (subject to reset if the pandemic recurs), the federal backstop should be provided without charge (as is the case with TRIA) to ensure affordability and maximum take-up, and the economic resiliency that will foster. To effectively speed economic recovery and help limit job losses, the federal backstop should support not only business interruption coverage, but also other pandemic- impacted lines of insurance, such as event cancellation, workers compensation, production or cast insurance (for film and television productions), trade credit, and general and employment practices liability insurance.
As recognized by all other major proposals currently being vetted, the business interruption line of insurance needs a special rule given the particular gap exposed by the COVID-19 crisis. That is, the insurance product needs to be both for non-physical-damage business interruption (NDBI) and provided on a parametric basis, which may be the only way to ensure widespread, rapid delivery of assistance to America’s businesses in future pandemic crises. Liquidity to meet these rapid pay-outs should be guaranteed. Insurers can be given an option to satisfy their availability duty by supporting a joint underwriting facility which would itself have a federal backstop. Maximum utilization of global reinsurance capacity and capital markets should also be encouraged. Long-term program continuity is paramount given the time horizon needed for financing this risk.
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