Coverage for business interruption (BI) risks due to pandemics should be designed to reflect existing federal insurance programs such as Terrorism Risk Insurance Program and the National Flood Insurance Program, according to the American Academy of Actuaries.
The Academy wrote to the US House Committee in a recent letter explaining that such an approach would be preferable to a model that loads the costs of pandemic risks into premiums the way commercial insurers normally would.
“From an actuarial perspective, pricing the potentially infrequent but high, widespread costs of pandemic risk into premiums as they would typically be calculated in the commercial market could raise affordability and other issues that programs like Terrorism Risk Insurance Program and National Flood Insurance Program are specifically designed to address,” said Academy Vice President, Casualty, Lisa Slotznick, who signed a letter on behalf of the Academy’s Casualty Practice Council to the House committee.
The letter further noted that existing federal programs help the insurance market “by putting a cap on how much risk the marketplace is expected to handle and then providing a federal backstop for the rare and unpredictable event that exceeds that cap.”
The American Academy of Actuaries urged committee members to consider several challenges posed by adding coverage of pandemic risk to BI policies through a commercial insurance approach.
These include the difficulty of determining expected costs associated with current and future pandemics and the effects on premiums, which could potentially render policies unaffordable for many businesses.
Actuaries also highlighted the impracticality for insurers of high premiums and of setting aside appropriate capital and assets from a commercial perspective, as well as the impact to insurer assets, and the inability to diversify geographically during a pandemic.