By Paul Howard and Amber Hay

Law360 (December 1, 2020, 5:55 PM EST )

Paul Howard

Amber Hay

While the insurance industry remains predominantly regulated at the state level, there are a number of areas where federal-level action could affect the sector.

The election results do not necessarily move the needle much legislatively, but the incoming Biden administration may set a new regulatory tone on issues such as climate change, where impacts may be felt in the insurance industry and beyond.

Federal Legislative Issues

Due to a long-standing deference to state insurance regulation, as memorialized in the McCarran-Ferguson Act, insurance matters rarely dominate the financial services agenda in Congress. However, at least two insurance-related matters are likely to see some level of congressional action in the 117th Congress: a potential pandemic insurance program and flood insurance reform/reauthorization.

Pandemic Insurance Program

One item expected to see action in the 117th Congress is the potential establishment of a federal program to insure against pandemic-related business losses. The insurance industry — and particularly the property casualty sector — has been, in many ways, both a victim and a scapegoat of the COVID-19 pandemic.

COVID-19 has already proved to be one of the costliest loss events ever for the industry, with pandemic-related losses estimated at $65 billion according to a Wells Fargo & Co. analysis.[1]

At the same time, there has been much attention paid to instances where insurers have denied pandemic-related claims, particularly business interruption claims, due to policy exclusions or terms/conditions, and the associated reputational risks have forced the industry into a somewhat defensive posture over the past eight months.

A number of proposals seeking to force insurers retroactively to cover pandemic losses have been floated at both the state and federal level, and while unsuccessful, such efforts have diverted attention from more prospective action.

While insurers, as a general matter, did not cover pandemic-related losses in commercial business interruption policies, policymakers are exploring avenues to provide businesses with a greater level of protection for future pandemics, and to encourage the participation of the insurance sector in such a program to the extent feasible.

Rep. Carolyn Maloney, D-N.Y., introduced the Pandemic Risk Insurance Act of 2020, H.R. 7011, on May 26, which would create a federal backstop for insurers offering pandemic coverage, modeled after the Terrorism Risk Insurance Act enacted in the wake of 9/11. The bill has yet to garner any Republican co-sponsors, and has functioned more as an opening position to bring stakeholders to the negotiating table.

The insurance industry remains wary of becoming too exposed to pandemic risk, as potential losses can be catastrophic and difficult to diversify where a pandemic is on a global scale. Additional concerns also influence potential solutions, such as the claims handling capacity that would be necessary to address nationwide or even worldwide insurance losses.

Thus far, in addition to Maloney's bill, a number of proposals have emerged.

A large segment of the insurance industry, led by the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies and the Independent Insurance Agents & Brokers of America Inc., has proposed the establishment of a government-backed product to provide businesses with a defined level of assistance on a parametric basis, thus obviating the need for claims handling capacity.

The proposal, titled the Business Continuity Protection Program, would permit insurers and insurance producers to sell the product in a similar manner to the National Flood Insurance Program and in some respects the World War II-era War Damage Insurance Corporation.

Some individual insurers, including Chubb Ltd. and Zurich Insurance Group AG, have offered alternative proposals, while a policyholder group known as the Business Continuity Coalition has offered a set of principles for a pandemic insurance program along with more specific recommendations.

There appears to be bipartisan support for considering legislation in this area in the new Congress. The House Financial Services Committee held a hearing on this topic on Nov. 19, and heard from a number of witnesses about the merits of many of the proposals that have been circulating.

A key determining factor will be whether a consensus proposal can emerge from the business community and the insurance industry similar to the consensus that prompted the relatively easy reauthorization of Terrorism Risk Insurance Act in late 2019.

While there appears to be some fairly broad agreement among insurers and policyholders at the conceptual level, there are a number of sensitive issues that need to be resolved, such as whether insurers should be required to offer pandemic coverage, what lines of insurance should be covered, and whether private insurers should bear any portion of the risk.

There is no clear partisan division on the parameters of a pandemic insurance program at this time, so the election's outcome does not move the needle much; movement remains mostly contingent upon greater stakeholder consensus on the path forward. Should an agreement emerge, we expect to see legislative action follow with decent chances for enactment.

Flood Insurance Reauthorization

The 117th Congress may also consider legislation to reauthorize the National Flood Insurance Program. The last full reauthorization of NFIP was the Biggert-Waters Flood Insurance Reform Act of 2012, and since 2017, the program has survived through a series of short-term extensions as debate over a broader reform package has stalled.

There is broad consensus that NFIP — which has remained heavily in debt since the 2005 hurricane season  — needs further reforms, but agreement on what those reforms should be remains elusive. While some of the divisions are along party lines, others are more geographical, with members from coastal and flood-prone districts often more focused on preserving existing subsidies where others look to ensure that premium rates are actuarily sound.

There was a significant breakthrough on NFIP reform in the House in 2019, as House Financial Services Committee Chairwoman Maxine Waters, D-Calif., and Ranking Member Patrick McHenry, R-N.C., reached a compromise deal in the form of a 5-year reauthorization package which garnered a unanimous 59-0 vote out of committee.

Momentum stalled, however, on the House floor, where the bill never received consideration. Even if it had passed the House, however, Senate action was uncertain at best, with a number of coastal state senators, such as Sens. Bob Menendez, D-N.J., and Bill Cassidy, R-La., expressing concerns that the measure did not go far enough in reforming NFIP claims handling.

Since a divided Congress has found only stalemate on NFIP reform, in addition to the fact that many of the sticking points do not always divide along party lines, the election results do not appear to have much impact on the prospects of enacting NFIP reform in the 117th Congress.

However, both parties agree that it remains a matter of unfinished business, and external events, such as a particularly damaging flood, could force the issue to the forefront. Indeed, the Biggert-Waters bill largely came together over a single weekend in 2012, after years of stalemate. Whether something similar could happen in 2021 remains to be seen, but is always a possibility.

Executive Action

With insurance regulation firmly in the hands of state regulators, there are limited ways in which federal executive action might affect the insurance industry. One area to watch is the extent to which the incoming Biden administration might urge a renewed focus on climate risk in financial regulation.

President-elect Joe Biden's pick for U.S. Department of the Treasury Secretary, Janet Yellen, has spoken previously about the need for financial institutions to take seriously the risks climate change pose to their balance sheets, and as head of the Financial Stability Oversight Council, she will be in a position to influence the direction of climate change policy even for those industries not directly regulated by federal agencies.

To be sure, the insurance industry, and state insurance regulators, are already assessing the risks posed by climate change — and indeed are often on the front lines of its impact, through increased wildfire, flood and windstorm losses.

Additionally, with Yellen leading the FSOC, there may be renewed attention on nonbank financial companies and potential systemic risks they present.

With the de-designation of Prudential Financial Inc. in 2018, there are no longer any insurers, or any other nonbank financial companies, designated as systemically important financial institutions by the FSOC. While it is far from clear that any specific insurer is in imminent danger of being designated, a renewed focus on nonbank financial institutions is certain to be closely watched by the industry.

Conclusion

The 2020 election results are not likely to have much impact on legislative matters specific to the insurance industry, as the fault lines that have stalled legislative action on key insurance matters do not necessarily break along party affiliation.

Whether the incoming Biden administration pushes federal initiatives that are specific to the insurance sector remains to be seen, but there are a number of areas where impact on insurers could materialize, and will be closely watched by insurance stakeholders in 2021 and beyond.

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Paul Howard is a managing director and Amber Hay is a senior associate at Arnold & Porter.

Charles Landgraf, senior counsel at the firm, and Charles Yi, a partner at the firm, contributed to this article. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Matthew Lerner, "Insurers Cope with Pandemic Losses Amid Hardening Market" (August 25, 2020), Business Insurance, available at https://www.businessinsurance.com/article/20200825/NEWS06/912336284/Insurers-cope-with-pandemic-losses-amid-hardening-market.

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