The Pandemic's Implications for the Insurance Industry and a Possible Solution [VIDEO]
In this exclusive expert video briefing from the IMS COVID-19 Research Insights Series, we speak with Commercial Insurance Industry Expert, Ty Sagalow, about the role the insurance industry will play as the COVID-19 pandemic continues to evolve.
Chris Ritter: Hello, Ty. It's good to see you.
Ty Sagalow: Good to see you, Chris.
Ritter: I hope you're well. I hope your family's well and you're staying productive during this very strange time we're in.
Sagalow: I am. And you too.
Ritter: Yeah. Thank you. Ty, you've been doing insurance work for a good long time, I think probably close to 40 years. And I know you have gone through a lot of what would be considered the prior disasters, hurricanes and earthquakes and fires and 9/11 and all that other stuff that have kept us on our toes over the last few years. But this is a unique situation and I guess I'd like to talk with you about what you see are some of the issues as a result of the COVID-19 epidemic and all of the things that it's had and the effects that it's had on our lives.
Ritter: How is this going to affect the insurance industry overall, its profitability, its ability to continue to offer product, the kinds of things that we have gotten used to over the past generations?
Sagalow: Well, the insurance industry has not had a hard market for, I don't know, ten years. I haven't looked it up, but many, many, many years. There is literally a generation that has been brought up that has never seen a hard market. And for people in the audience who don't know what a hard market is, it is a sharp increase in rates as a result usually of either a substantial amount of losses that are not contemplated in the current premium structure or simply a year over year over year decrease in premium that is no longer sustainable.
Sagalow: So, it's been a long time coming, even before COVID-19. So now we are seeing a tremendous increase in rates, doubling, tripling, quadrupling. Certainly, in DNO, ENO, professional lines we're seeing COVID0-19 exclusions popping up almost everywhere, business interruption policies obviously, then cancellation policies. We have film production that can't be done. Forget about the fact of trying to get the actors and the actresses put together because they fear getting sick, they can't get insurance because the insurance has the exclusions.
Sagalow: And then we have legitimate things like questionnaires and people saying, "How are you handling COVID-19 and what's your process and procedures?" So the insurance industry is trying to handle this by a series of questionnaires, which I think are legitimate, rate increases that I think are long overdue, exclusions that are not making people happy but what can you do until you find a better way, which is going to be your next question, I think. And struggling along. But clearly the insurance industry on its own I don't think is the answer because there are too many exclusions popping up.
Ritter: You're right. My next question is going to be, we're in a mess, how do we get out of it?
Sagalow: So, there are three solutions to this mess. The first solution which is very popular but doesn't make any sense and is unconstitutional, but other than that it's perfect, is to force the insurance industry to retroactively pay for everything. The second solution is to do nothing and let the market take care of it itself, the magic hand of the market. And the third is to encourage the insurance industry to solve the problem but with help from the government, with a public/private partnership.
Sagalow: Let me take each at a time. Forcing the industry to pay for everything retroactively. This is very-
Ritter: I'm sorry. That's been happening. There's legislation that has been proposed and/or enacted along that line, right?
Sagalow: Proposed, never enacted. So, this is very popular with state governments. Let me rephrase. Very popular with state politicians. Because the insurance industry is the bad guy so state politicians get a lot of saying, we're going to pass a law requiring the insurance industry to retroactively pay for all of this, all exclusions are retroactively void. Bada-bing, bada-bang, as we say in New Jersey. The problem with that is that there's not enough money in the insurance industry to pay for it and there's a little thing called The Constitution that prevents you from doing that. However, everyone knows that that is the case and so none of this will ever pass but it looks good.
Sagalow: The second is to do nothing and let the insurance industry handle it on its own. The problem with that is that you're going to end up with the situation we just described which is a lot of exclusions. That really is not an effective way to spread a legitimate risk across all of society. There's only two ways of really doing that effectively. One is a multi-trillion-dollar government bailout, which is what has happened, paid for by the taxpayers. Now, certain members of society feel that's what we do. We do nothing and then there's a crisis and then the federal government passes a series of multi-trillion dollar give backs paid by all tax payers and that's how we take the risk and spread it among all of society.
Sagalow: I particularly think that that doesn't work out really that great. The better way is for the public sector and the private sector to work together by thinking about this stuff in advance. The best example of that, although it's not quite in advance, is TRIA, Terrorism Risk Insurance Act. Now, TRIA has been around since 2002. So, there may be some folks that are listening to this that doesn't remember 2002. So, for those people, I will give a short history.
Sagalow: The Terrorism Risk Insurance Act was signed into law by President George W. Bush. He was the 9/11 president for those guys that are too young to remember, on November 26, 2002. It's a backstop for insurance claims related to acts of terrorism and was the first, I think, really successful public/private partnership, assuming that flood insurance is not really a great success. The program was renewed a number of times. Last renewed just recently, December 17, 2019 overwhelmingly by both The Senate and The House. Despite all the problems with democrats and republicans these days, they both overwhelmingly renewed the program signed by President Trump, now expires December 31, 2027.
Sagalow: Now, the way it works is this. The insurance industry must offer TRIA coverage, which is coverage for a terrorist act, declared to be terrorism by the Department of Treasury, believe it or not, because the insurance department reports to treasury on a federal level. Most of it is state. Policy holders have the option to opt out. Okay. In the event of a terrorist act, an act of terrorism, the industry has a very big deductible because they've been collecting money all these years. So, the deductible is now up to twenty-seven and a half billion dollars. The government will then reinsure 80% of a loss above the twenty-seven and a half billion up to 100 billion dollars a year and then the federal government will be repaid by the industry, so it's not a grant, it's a loan. It's reinsurnace. They get paid back by way of a mandatory 3% additional premium on every commercial policy thereafter.
Sagalow: Now, so far there have been no acts of terrorism and everything has been hunky dory fine. Now, PRIA, Pandemic Risk Insurance Act, bill just went in June 11, 2020, HR7011. Very, very similar. It would apply to any outbreak of infectious disease or pandemic on or after January 1, 2021 that prompts an emergency declaration of public health insurance act and is certified by a public health emergency. Participation would be voluntary by insurance companies, but everybody would do it, frankly in my opinion. Again, it's very, very similar. Insurers could charge a fee for the policy holders that decide to get this coverage. It would insure up to 750 billion dollars, federal reinsurance would be 95% then would lower over years presumably but would start off at 95%. Excess of a 250-million-dollar deductible by the insurance industry up to 750 billion dollars. So very, very similar.
Sagalow: We'll see how it works. But in my humble opinion, I believe that is the ultimate answer.
Ritter: It's currently, that legislation's been introduced. Do you know the current status? Is it just too early to-?
Sagalow: No. It was just introduced. I assume that there'll be a similar senate bill. I'm following it closely.
Ritter: And that's going to take care of problems in the future, just as TRIA took care of future potential terrorist acts. We're still left though with trying to figure out what we do now and how we take care of the stuff which has happened.
Sagalow: Regrettably, it's the federal taxpayers, right? As you know, as we're speaking today, there's a pending legislation for another trillion-dollar bailout. Your guess is as good as mine as to how much eventually Congress will allocate to this out of taxpayer money.
Ritter: So with respect to the current problem, it sounds like the first solution you suggested is being offered, which is to go back and effectively completely retroactively re-write the policies is not only illegal but quite frankly a bad policy decision. The third solution you're suggesting, which sounds like a great one, the PRIA, the TRIA is a great solution for the future but we're still left with this incredible mess that we have to deal with that we're currently dealing with and will probably be dealing with for a long time related to this problem that's come about as a result of COVID-19.
Sagalow: It's the same thing as we try to teach our kids.