Global insurer and reinsurer Chubb has put forward a proposal for a public-private partnership program to provide business interruption (BI) cover for all kinds of US business ahead of the next pandemic.
The company envisions the scheme’s total capacity at around $1.15 trillion, consisting of an aggregate limit of $750 billion for small businesses and $400 billion of aggregate limit for medium to large businesses.
“Some risks can create losses so great that they are not insurable in the private insurance market without substantial government support, including catastrophic terrorism, nuclear accidents and pandemics,” Chubb noted.
“These catastrophic events can cause massive economic disruption as governments struggle, as they have in response to COVID–19, to provide effective and timely assistance through programs cobbled together after the disaster has struck,” the company explained.
“Not surprisingly, these ad hoc programs can lead to inefficiencies, substantial delay and uncertainty, as well as real and perceived unfairness in aid distribution.”
Instead, Chubb’s program aims to provide affordability and certainty for about the amount of financial support available to business if a pandemic shuts down the economy.
For small businesses (500 or fewer employees), Chubb’s program proposes to utilise parametric triggers to ensure quick payments of a pre-determined sum.
All P&C insurers currently writing business insurance must offer the program to small businesses, and businesses that decline the coverage must acknowledge they will not be covered for pandemic business losses or be eligible for federal program benefits.
Chubb suggested that the aggregate limit of $750 billion for small businesses would consist of a first layer of $250 billion with the industry’s share of $15 billion in year one, rising to $30 billion over the course of 20 years.
For this layer, insurers would handle payment of the insured amount, absorbing 6% of first–dollar claims up to a carrier’s market share of the $250 billion industry limit, rising to 12% over time. The government would then fund the balance up to the industry limit of $250 billion.
The second layer would be up to $500 billion excess of the $250 billion layer, and funded 100% by the government.
For medium to large businesses (more than 500 employees), the program would provide government support through Pandemic Re, a government reinsurance entity created for this purpose.
Chubb describes Pandemic Re is an indemnity–based program in which both the insurance industry and the government are paid an appropriate risk–adjusted price for pandemic cover.
Participation by businesses and insurers is voluntary for this part of the program, and participating insurers would retain a portion of each risk and reinsure the rest to Pandemic Re.
The business interruption coverage would be written on modified standard industry forms, providing payment for business expenses with a maximum payout of $50 million per policy.
The total program capacity would be $400 billion of aggregate limit, with industry share in year one set at a maximum of $15 billion, rising to $30 billion in year 10 of the program.
According to Chubb, insurers would collect 100% of the premium, retain their proportional share and cede the balance to Pandemic Re for government share. Insurers pay claims, which are drawn down on Pandemic Re’s letter of credit for government share of loss.
The program is advantageous, Chubb says, because it commits insurance industry capital and provides opportunity for increased risk–sharing over time as direct and secondary markets develop, ultimately lessening government pandemic burden.
Meanwhile, the industry develops valuable risk management and risk mitigation knowledge and experience to encourage better societal behaviours related to pandemic risk.
And at the same time, it aims to provide transparency, certainty of relief and a level playing field for businesses faced with pandemic loss, potentially reducing economic disruption as businesses are able to maintain private sector payrolls and pay expenses.