Adding to the mix of ideas for a public-private pandemic risk partnerships between insurers and the federal government, Zurich is proposing a plan that gives insurers a role—and a say in how much risk they take on.
Pete Caminiti, Head of Zurich North America’s home office property unit, pushed back on the idea that the Zurich proposal competes with previous ones designed to compensate businesses for some of financial burdens associated with lockdowns, including: the Pandemic Risk Insurance Act (H.R. 7011), a federal government reinsurance backstop modeled after the Terrorism Risk Insurance Act; the Business Continuity Protection Program (BCPP), a revenue replacement assistance plan unveiled by the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies and the Independent Insurance Agents & Brokers of America in May; and an alternative unveiled by Chubb in July, combining a risk-based program for larger business and a BCPP-like program for small businesses.
Speaking to Carrier Management a day before he was scheduled to describe the Zurich proposal to lawmakers at an NCOIL meeting, and a day after Zurich NA Chief Underwriting Officer Brandon Fick unveiled the idea at the NAIC, Caminiti said of the Zurich’s intention is to introduce some concepts into the conversation to help all the involved stakeholders find some common ground.
“We all agree that there’s some form of a public-private partnership that’s necessary. We all agree that pandemic on its own is not insurable and not something that the P/C industry has the surplus to take on its own,” he said, when asked how Zurich’s plan stands apart.
“One of the big differences for our concept is in the role of the insurer,” Caminiti said. “We believe we [insurers] have a significant role to play. We believe there is the potential for risk-sharing in a very controlled fashion.” But, Zurich also believes that “carriers need to be the ones in control of that decision.”
“We provide a mechanism to allow carriers with different risk appetites… to make those decisions themselves,” he said, referring to an idea borrowed from the Federal Crop Insurance Program. Essentially, the pandemic plan mechanism lets carriers choose whether they will cede 100 percent of the risk they take on back to the federal government, or whether they will cede a smaller amount.
Under Zurich’s plan, all insurers of commercial property insurance policies would have to offer a standalone pandemic risk policy. Each carrier can then decide to cede that risk into one of three federal reinsurance pools: Pool 1, reinsuring the risk 100 percent; Pool 2, with 95 percent reinsurance and Pool 3, offering 90 percent.
Referring to the 95 percent and 90 percent pools, he said, “We’re still talking about a fairly low risk retention by the insurance industry. Where we see our value really being brought to the table is on the customer service, the risk mitigation, in tapping into the insurance industry’s established infrastructure to really service customers.” And also, to “start to learn the risk—start to participate in some of the risk.”
“But by no means are we expecting the insurance industry is going to try to solve this problem with their balance sheet,” he said.
Prior to the interview, Zurich supplied CM with an outline of the proposal and results of a simulated model of the plan in action developed by Zurich with the Reinsurance Association of America (which did not endorse the Zurich plan). The simulation, based on a $3.3 trillion economic event over three months ($1.1 trillion each month), produced as $1.6 trillion insured event with insurance industry bearing $15 billion, or 1 percent of insured losses, under the plan. The federal government retained 99 percent of the insured losses based on simulated carrier risk appetites.
During the interview, Caminiti provided additional details of the plan and the thinking behind it, and explained some nuances of pricing by the federal government that would make coverage more affordable to businesses.
Q: Explain a few of the basic mechanics: Who is covered? How is coverage triggered?
Caminiti: We’re trying to solve a very specific problem—the problem of shut down [during] a novel pandemic. You need time to be able to shut down, assess what you have from a federal and state government perspective.
[The insurance] product in our concept would cover 80 percent of operating expenses for up to three months duration. It’s a standalone product. It’s not an endorsement to an existing insurance product….
It would be a federal product—federal form, federal rules, federal rates.
The trigger would be a parametric [one] because, again, the problem we’re trying to solve here really is a liquidity problem. A traditional claims adjustment process would just take too long. We need quick access to cash for these businesses. … The triggers would be a combination dual trigger of both the federal and state level orders. … Cash would then flow to businesses.
We haven’t worked out exactly what a payment schedule would be, but businesses would be getting a predetermined, known amount based on the amount of coverage that they purchase. So, they would have that certainty.
Insurers would be need access to liquidity….So, they would have to be a line of credit to the U.S. Treasury that they would draw from directly in order to make claim payments.
Q: How is the price of the coverage determined?
Caminiti: Pricing would be established at a federal level. We don’t want individual carriers, setting price. An important part about making this really successful is it has to be affordable. And in order to make it affordable, we’re going to need assistance from the federal government from a subsidy standpoint….
When we think about subsidy, where we think the Federal Government has an opportunity to [make prices] actuarially sound yet provide relief in pricing is through the time horizon—the return period that they look at in their pricing. Given the nature of pandemic and the frequency [of] these events, you could take a 50- or a 100-year return period view in your pricing to make sure that you’re collecting enough over that 50-year period or 100-year period to pay for an event, which would create very affordable rates. That’s not something the private industry could do.
Private carriers would not be able to say we’re willing to price for a 50- or a 100-year return period. We of course, would want to price for a much shorter duration in the event that there was back-to-back events. That’s really where a big piece of a form of subsidy comes from to make this affordable.
[And] regardless of who you got a quote from, you would be getting the same price.
Q: Carriers have to offer it. Do businesses to purchase it?
Caminiti: It’s a voluntary to purchase. All U.S. businesses are eligible [but] the product responds a little bit differently. … We envision a cap on the total amount of coverage available for the largest insureds, so that you’re really focusing most of your relief on your small to midsize companies.
This product would be made available to all companies. It would be a take-all-comers approach, meaning that carriers could not decline—not for underwriting reasons. …If you’re offering a quote for commercial property, whether that’s through a standalone property policy [or] a package policy, you must offer this product as well. It’s a federal standalone product. You must offer that product.
However, this is where the reinsurance pools come into play. The carrier can now choose, which risks they want to retain some share of and how much—we say, policy by policy [but I don’t] imagine that this would ever be executed at that level. [A carrier] might say, for these classes of business and certain geographies, I’m willing to take up to a certain amount. And at some point I’m then going to shift. I’ve filled my basket of risk [and] I’m going to start placing the rest into a different pool.
It allows a lot of creativity on the carrier side for how much risk they want to manage.
Q: Some of the program documentation includes the term “premium subsidy.” Is that a reference to the pricing discount for the long time horizon between events? Or will certain businesses actually receive some type of subsidy?
Caminiti: Subsidy or support from the federal government from a pricing perspective will come in a couple of forms. No. 1 is that long-term view, setting rates anticipating that you’re only going to recoup over 50- or 100-year time horizons. …
No. 2: We want carriers to have the choice to participate in risk…We would encourage carriers to put some business into Pool 2 or 3 where they retain risk. [But] carriers are only going to do so if they believe that that is rate adequate.
If you’re looking at the first form of subsidy being a very long time horizon, and something that the private sector wouldn’t be able to do, then you automatically have a conflict—because a carrier being asked to retain some of the risks is immediately going to say that this is rate inadequate. So, the other form of subsidy comes through the ceding commission offered in each of those pools. In Pool 2 and Pool 3, carriers would be paid a bit of a higher premium from the federal government for participation in the form of a ceding commission.
Q: Some of the online documentation of the proposal dates back to August. Where has Zurich presented this before, and what has been the reaction from the various stakeholder?
Caminiti: It really starts with the approach that we’ve taken. And as I mentioned, we haven’t approached this as a competing proposal. Our aim was not to say here’s the Zurich proposal. So, while we have been working on this, really since the start, our approach has been to work with stakeholders, work with the policyholder community, work with our fellow carriers, work with regulators and members of Congress and their staffs to really just introduce concepts and options.
We’ve had extensive discussions, and again, these are mainly private discussions because it hasn’t been our aim to put out a Zurich Proposal.
The reaction has been appreciative that we are putting additional ideas on the table for stakeholders to consider. The modeling that we’ve done has demonstrated the depth of the thought that we’ve put into this. And I think that has helped a lot of the individuals and groups that we’ve spoken with to wrap their head around some of the ideas that are either in our concept, or in some of the other proposals—so you can start to put dollars to it.