Attempts to stimulate the US economy amid the coronavirus (COVID-19) pandemic will not work without the introduction of a government reinsurance backstop for pandemic, according to Mark Watson, founder and principal of Aquila Capital Partners and former CEO of Argo Group.
Writing as part of an article in Morning Consult, Watson argued that any follow-ups to the $2 trillion stimulus package approved last month won’t work as intended without a modification to a 2002 law that provides a state backstop.
“President Trump, and Democrats and Republicans in Congress, need to build on TRIA and broaden federal reinsurance to encompass not only terrorism, but viral pandemics, new types of cyber-attacks and other rare but catastrophic events,” Watson said.
Using parametric triggers would offer a clear-cut way of determining how much a business recoups for a given amount of financial damage, he explained, making for a transparent model of shared public and private compensation.
“And this wouldn’t be a handout, since companies would still need to contribute,” Watson added, noting that the Terrorism Risk Insurance Act has never paid a claim to date.
The need for a government backstop arises out of the risk that pandemic risk could be retroactively inserted into business interruption contracts, even when the contracts explicitly exclude these risks.
But Watson believes that COVID-19 losses could potentially reach into the many trillions of dollars, far outweighing the total surplus for auto, home and business insurers in the US and putting the entire industry at risk.
If a government backstop similar to TRIA is introduced, it would make it economical for primary insurers to continue offering pandemic coverage, while maintaining affordable premiums for insurance policies in other lines.
This made it economical for primary insurers to offer terrorism insurance, and for businesses to pay for it. And it kept other insurance policies — for automobiles, houses, floods — affordable for families and businesses.
“In the context of a warming planet, an increasingly globalized world and the ubiquity of the internet of things, we need to be prepared,” Watson wrote. “Right now, governments are making the right decision to close non-essential businesses, which is why government needs to be part of the solution.”
“Providing the guarantee of federal reinsurance for exogenous occurrences would inject confidence into the economy today, and create an effective framework for when we emerge from this crisis,” he concluded. “It would also give the next stimulus package a fighting chance at success.”
