As actuaries grapple with building simulation models of the pandemic utilizing unfamiliar and historically uncommon data like virus infection rate, case fatality rate, hospitalization fatality rate and length of time needed to develop a vaccine, the American Academy of Actuaries is asking the U.S. House Committee on Financial Services for a federal insurance program for pandemic business interruption coverage.
“Pandemic risk is more similar to the catastrophic risks covered by programs like the Terrorism Risk Insurance Program and the National Flood Insurance Program than to risks normally insured by the commercial insurance market, and any new federal program seeking to facilitate pandemic risk coverage should reflect that difference,” said Academy Vice President, Casualty, Lisa Slotznick, the signer of the May 11 letter on behalf of the Academy’s Casualty Practice Council to the House Committee. “From an actuarial perspective, pricing the potentially infrequent but high, widespread costs of pandemic risk into premiums as they would typically be calculated in the commercial market could raise affordability and other issues that programs like Terrorism Risk Insurance Program and National Flood Insurance Program are specifically designed to address.”
The Academy went on to detail the challenges commercial insurers would face in offering pandemic business interruption coverage for a future pandemic:
- The difficulty in determining costs due to the uncertainty of the severity and length of the pandemic.
- The potential cost being high enough to make the premium unaffordable.
- The requirement to set aside capital and assets at a level that would be untenable.
- Valuing the economic shocks from a future pandemic requiring even more asset reserves.
- The inability to diversify risk geographically due to the widespread nature of a pandemic.
The May 11 Academy letter goes on to suggest the components of a new pandemic business interruption coverage program:
- Cap the amount of financial risk the insurance industry is expected to absorb.
- Create a mechanism for the U.S. Department of the Treasury to provide temporary unlimited funding if claims exceed that cap.
- Provide a plan for the Treasury potentially to be reimbursed after the event.
Stay tuned in as other industry associations and policymakers weigh in on their recommendations for a federal insurance program for pandemic business interruption coverage.