Government Help Needed!

Governments and companies around the world are working hard to minimize the economic effects of the COVID-19 crisis on their public and private economies.

They have initiated efforts at the regional, national and local level to support economies facing billions in uninsured losses. Those efforts focus both on allocating recovery funds to countries and industries in need now, often based on a commitment to future resiliency, and exploring the need for non-damage business interruption (NDBI) coverage or other risk transfer mechanisms through public-private partnerships to help reduce economic losses in future pandemics.

Snapshot of European Recovery

The European Union, with its Next Gen EU, an element of the Europe Recovery Plan, has assured a €750 billion ($882 billion) reserve fund, with an additional €264 billion ($310 billion) through EU budget financing, to support and kick-start member states’ economies and help private investments. The funds will be allocated to the Recovery and Resilience Facility, which will then provide member states with the large-scale financial support to mitigate the economic, social and public health impact of the COVID-19 pandemic. Perhaps most importantly, the funds are meant to create resiliency for the future, with investments in environmental sustainability, education, employment and social cohesion, as well as reforms based on the European green and digital transition. Based on those requirements, Italy will receive the highest portion of funds with €63 billion ($74 billion, or 8.4% of the total available funds), followed by Spain with €62 billion ($73 billion), France €32 billion ($37.6 billion), and then Poland and Germany, with €26 billion ($30.6 billion) and €22 billion ($25.9 billion), respectively.

At the national level, many European countries have launched their own pandemic recovery initiatives. In France, for example, the French Insurance Federation committed €1.5 billion ($1.76 billion) to support the country’s healthcare and tourism industries—the most adversely affected sectors—and to boost investment for small and midsize enterprises.

The investment program consists of three tranches: first, over €100 million ($117.6 million) to investment funds, including those partnering with insurers for the benefit of small and midsize enterprises; second, €150 million ($176.4 million) to finance tourism companies; and third, a €600 million ($705.6 million) payment to the healthcare sector to help strengthen research, infrastructure, logistics and healthcare services. Similarly to the EU proposals, the investments are designed to promote a sustainable economic recovery by encouraging green investments. In fact, companies that use or produce thermal coal will be excluded from the program.

Non-Damage Business Interruption

Public-private partnerships for developing realistic coverage solutions for a pandemic are in talks across the United States and Europe. According to a report titled “Shared Resilience Solutions for Pandemic Risks,” released by the European Insurance and Occupational Pensions Authority, “A shared resilience solution comprises public and private sector participation, enabling a residual risk transfer between different layers of risk owners, on top of private companies or individuals: (1) insurance industry, (2) reinsurance industry or capital markets, (3) national government and (4) Europe. The measures that are taken—or not taken—at one layer will affect the efficiency and the impact of measures taken at another level.”

The Federation of European Risk Management Associations (Ferma) has also urged the European Commission to develop a Financial Resilience Framework that would address non-damage business interruption stemming from catastrophic risks that can create severe business losses without physical damage.

The federation proposes four levels for the framework:

• Enterprise-level risk management: anticipation, prevention, identification and mitigation of risks
• Transfer of risk to private insurance and reinsurance markets, developing enhanced coverage for non-damage business interruption
• National member state pool guarantees
• European Union support for, and coordination between, national governments.

Within individual European countries and states, public-private partnerships are also being discussed and developed with the goal of assisting the insurance industry with the coverage of current and future non-damage business interruption losses from the coronavirus pandemic.

The German state of Bavaria brokered an agreement between a number of insurers and trade associations for insurers to offer a voluntary payment to policyholders in the hospitality sector for 10% to 15% of the normal daily cost of business disruption that the insurers would fund on their own.

The Bavarian Ministry of Economic Affairs, Regional Development and Energy, says that, after accounting for factors such as operating expenses and short-term government relief, companies’ economic damage from the two-month lockdown has been cut by an average of 70%. The insurers’ voluntary contribution goes toward the 30% of remaining losses.

At the same time, the hospitality industry in Bavaria is suing insurers for a reported $1.8 million in COVID-related losses.

Swiss insurer Helvetica is offering compensation for 50% of non-covered costs and loss of profits to Swiss gastronomy companies that have epidemic insurance with a pandemic exclusion. Helvetica asks that, with acceptance of this settlement, the companies also agree to adjust their current insurance product.

Helvetica says that the settlement addresses conflicting views on the effectiveness of the pandemic exclusion in epidemic insurance and the fact that “until the Federal Supreme Court rules on the pandemic exclusion clause, uncertainty surrounds its interpretation. Such a ruling is likely to take place in a year or two at the earliest, which is of no use to anyone in the current situation.”

Other governments and private sector participants in Europe are in talks to develop solutions. Lloyd’s of London put out a report outlining short-, medium-, and long-term solutions, including two frameworks. One of these, dubbed “Recover Re,” could offer immediate positive impacts to a targeted portion of SMEs. Black Swan Re is a reinsurance framework that could offer protection against the next crisis to a wider set of businesses. Both the French Insurance Federation and German Insurance Association have also put forth proposals that include public-private partnerships.

United States Considers Proposals

In the United States, major industry stakeholders, including insurers Zurich and Chubb, have made five proposals for public-private partnerships. Zurich’s draft proposal, released in September, plays to its strengths in the U.S. crop insurance program. It proposes businesses receive premium subsidies based on size and would issue indemnity payments to cover routine costs like payroll, rent and taxes.

Chubb’s Pandemic Business Interruption Program would have two elements: a program for small businesses that provides an immediate cash infusion when a pandemic is declared, and a separate, voluntary program for midsize and large businesses with losses paid through the existing industry claims adjudication process. The insurer notes that both depend on the federal government’s assuming a substantial percentage of the risk, through direct U.S. Treasury funding to insurers for the small-business program and through a newly created government-run reinsurance entity for midsize and large business losses.

The major industry trades released a joint proposal at the end of May that takes cues from the National Flood Insurance Program. The Business Continuity Protection Program would reimburse up to 80% of routine financial obligations for up to three months. The Federal Emergency Management Association would handle the payments and administration of the program.

In May, Rep. Carolyn Maloney (D-New York) introduced HR 7011, the Pandemic Risk Insurance Act of 2020 (PRIA). This legislation would create the Pandemic Risk Reinsurance Program, a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies. The bill was developed on the basis of the Terrorism Risk Insurance Act (TRIA), which has been widely praised across the insurance industry as a government “backstop.” One scholar described TRIA as “a government-supported pool to cover the most catastrophic losses” that “facilitated the development of the market for terrorism insurance.” Yet TRIA has yet to be tested. The U.S. government must certify an act of terrorism to trigger TRIA, but since the act’s passage in 2002, that has never happened.

If passed, the Pandemic Risk Insurance Act would instruct insurers to cover NDBI claims as part of usual business interruption policies. The Treasury Department would then share the responsibility to pay claims for covered losses through a newly developed Pandemic Risk Reinsurance Program. Among other industry stakeholders, the act was endorsed by Marsh and The Council.

Lastly, a group of policyholders known as the Business Continuity Coalition has offered a plan that focuses more on widespread availability and coverage options that would appeal to businesses of all sizes and types. Similar public-private partnerships, with various risk exposures, are currently being discussed at the state level within the United States.

“At the end of the day,” says Joel Wood, senior vice president of government affairs at The Council, “we will support anything that will give our members and their clients the help and liquidity they need. Whether it’s Chubb’s proposal, or Zurich’s or PRIA, or a combination of all five of these proposals, as agents and brokers we have to be in the position to do what is best for our clients.”

According to an APCIA report, in the United States alone small businesses may face monthly costs between $255 billion and $431 billion as a result of business closures, including incidental expenses, payroll obligations and lost profits. Those figures far exceed the $18.4 billion annual average that insurers pay out on commercial multi-peril coverage, which would include physical damages, liability claims and business interruption. It remains to be seen if a realistic solution can be found. But Congress has been focused on passing legislation that would help with more immediate needs to soften the effects of the crisis, such as paycheck protection and healthcare enhancement, so lawmakers are unlikely to rush with a larger piece of legislation.

The true cost of the pandemic has far exceeded global expectations. In June 2017, for example, the World Bank issued pandemic bonds to provide financing to developing countries facing high risk of pandemics, such as Ebola outbreaks. The bond was expected to deliver $195 million in funding this year as the pandemic triggered a payout. However, the payout took longer than expected, and the amount was not large enough to help with the pandemic. To provide additional funding, the World Bank has distributed $160 billion in financing for the immediate health and longer-term social and economic impact of the COVID-19 crisis. Recently, the organization issued an $8 billion, five-year Sustainable Development Bond to provide additional financing for global response to the pandemic.

It’s clear that we are in need of new risk financing solutions. While there are some options in the market today, such as pandemic bonds, public-private partnerships and reserve funds, each one has yet to be proven effective in covering all aspects of pandemic recovery. Now more than ever, the public and private sectors are working together to provide economic support to struggling businesses, but comprehensive solutions are still far away.