By Jeff Sistrunk

Law360 (June 26, 2020, 3:20 PM EDT ) Debevoise & Plimpton LLP partner Eric Dinallo spoke with Law360 about how the COVID-19 crisis has impacted the insurance industry and spawned proposals for a government-backed reinsurance program for pandemic coverage and a federal fund to help businesses defray losses resulting from future pandemics.

Dinallo, who chairs Debevoise's insurance regulatory practice and formerly served as New York's insurance superintendent, said he has been closely following the Pandemic Risk Insurance Act of 2020, which was introduced in the House of Representatives last month by U.S. Rep. Carolyn Maloney, D-N.Y., and 20 co-sponsors. PRIA, which is modeled on the Terrorism Risk Insurance Act, or TRIA, would create a $750 billion backstop for insurers offering policies that explicitly cover policyholders' losses due to disruptions in operations attributed to an outbreak or pandemic that leads to a federal emergency declaration after Jan. 1, 2021.

In addition, Dinallo has been tracking a recent alternate proposal by a trio of insurance industry trade groups for a fully taxpayer-funded federal program, the Business Continuity Protection Program, to help businesses through financial challenges associated with future pandemics. Companies would pay to participate in the BCPP, which would be administered by the Federal Emergency Management Agency and offer reimbursement of up to 80% of payroll, benefits and operating expenses for three months after a federal declaration of a public health emergency. 

This interview has been edited for length and clarity. 

How has the pandemic affected the insurance industry overall?

On the life insurance side, I think the impact has been absorbable. It is tragic, and it is clear there will be increased mortality and morbidity, but the life insurance industry had modeled for a pandemic for decades. I think they are stress-tested and reserved adequately. This first wave was also not as extensive as it could have been. While there could be a second or third wave as there was in 1918, it feels to me as though the life insurance industry generally is not being overly challenged by this situation from a mortality standpoint.

On the property and casualty side, some estimates by Lloyd's of London and others are suggesting this may be the biggest loss event ever, with Hurricane Katrina perhaps being number two. With respect to business interruption coverage, it is clear there were very extensive exclusions in these BI policies. Short of some of these proposals in state legislatures to overturn these exclusions — which, to me, proves the exclusions were generally well-written, clear and would hold up in court — it appears the exclusions will keep the industry completely solvent. That is why they were put in in the first place, and why regulators originally authorized and have largely supported them.

Insurers have gone on record saying they did not price for this pandemic or reserve set premiums for it, and accordingly, it would be disastrous if they suddenly had to pay out potentially trillions of dollars in claims. That tends to prove the need for some other solution. This is where the discussion has arisen around the federal government stepping in and becoming involved in insurance for what would perhaps be only the third time, after flood and terrorism insurance.

How does the PRIA proposal compare to TRIA?

The thesis of PRIA is that without some version of federal reinsurance, we will not be able to get the industry to change its appetite activity or willingness to write business interruption insurance without pandemic or viral exclusions. I think that is where Carolyn Maloney's thinking is. Since she is from New York City and served in Congress during 9/11, as well as from my conversations with her office, it is clear that this proposal is was modeled on TRIA.

The aggregate insured losses to trigger the backstop are very close in the two programs: $250 million for PRIA, and $200 million for TRIA. The caps are obviously different, but they reflect the extreme severity of a full-blown pandemic. The federal share of losses under PRIA is generous, in that it is 95% to TRIA's 80%.

There are two important distinctions to keep in mind when comparing PRIA and TRIA. The first is PRIA's voluntary nature. There are pros and cons to that. The pros are that it minimizes the level of government intervention and the optics of forcing the industry to write insurance.

The problem could be that, if you do not get enough volunteers, you may not get enough capital to accomplish the goal of getting a lot of business interruption insurance out there without exclusions. This is a capital providing version inversely related to what President [Barack] Obama and others confronted with Obamacare and other health insurance pools where, if you do not get enough in, an underwriters' version of adverse selection sets in.

Another potential sticking point with PRIA is this idea that, after the $750 billion cap is exhausted, the insurance industry would again be responsible for losses. Under TRIA, the insurers wanted that cap to be as low as possible, because with TRIA, the cap is $100 billion, and insurers are off the hook after that. Here, the cap is $750 billion and could be negotiated up to $1 trillion, because insurers are on the hook after that. There is theoretically an infinite amount of losses the industry picks back up after this $750 billion cap is finished, although, the bill gives treasury discretion to determine the industries' share of those amounts.

The lack of clarity on that point in the bill may force a discussion about when the industry is demonstrably not responsible any longer. Otherwise, it could be hard to get pricing. That is a legitimate request from the industry, to get a sense of where its responsibility ends.

What are your thoughts on the BCPP?

The BCPP in part emanates from the industry's position that pandemic risk is effectively uninsurable.

The difference between a pandemic and terrorism is the lack of concentration that you usually see in P&C insurance. There could be, God forbid, a terrorist attack, hurricane or biblical fire, but the event is usually localized. The industry's point is that insurance is about this pooling aspect. Insureds pay in so that one person's tragic loss does not have to be solely borne by them.

The pandemic has proven that this principle may not apply if everyone pays in, but all of that money is immediately evacuated. Maybe the statement the industry should be making is that this problem is not fixable by insurance — that is, insurance is not the right mechanism to address pandemics. In the industry's view, a pandemic of this kind, on a business interruption level, has to be addressed much like flood insurance, where relief is provided by a federal government agency that does not have to worry about solvency and has an unending capital ability.

While FEMA would oversee this program, maybe there is a world in which the insurance industry could be involved in the claims administration. I do frankly think that the industry has the expertise and the infrastructure, if not the capital to be the solution. It is not that the insurance industry does not want to be experts and be involved, but their view is that the capital commitments required are beyond the industry's capabilities.

--Editing by Rebecca Flanagan.

For a reprint of this article, please contact reprints@law360.com.