Casualty Quarterly, Summer 2020
VOL 4 | NO 2
SlotznickIn late June, the Casualty Practice Council (CPC) sent a comment letter to congressional leaders on pending pandemic legislation. The CPC commented on the latest draft of legislation (H.R. 7011) to facilitate business interruption (BI) coverage for pandemic flu events in the future. They noted that while a government backstop makes such coverage possible, adding this new risk will increase the cost of the product, and wrote that fewer than 40 percent of small businesses buy BI coverage now. They also raised a number of technical questions about various aspects of the proposed Pandemic Risk Reinsurance Program.
Also, in May the Casualty Practice Council submitted comments to the U.S. House of Representatives Financial Services Committee on a discussion draft of the Pandemic Risk Insurance Act (PRIA), urging committee members to consider specific challenges that would be posed by adding coverage of pandemic risk to BI policies through a commercial insurance approach.
“Pandemic risk is more similar to the catastrophic risks covered by programs like the Terrorism Risk Insurance Program [TRIP] and the National Flood Insurance Program [NFIP] than to risks normally insured by the commercial insurance market, and any new federal program seeking to facilitate pandemic risk coverage should reflect that difference,” Lisa Slotznick, Academy vice president, casualty, said in an Academy news release on the letter.
“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 the TRIP and the NFIP are specifically designed to address,” Slotznick said.
Casualty Quarterly asked Slotznick about some of key aspects of pandemic risk insurance, reinsurance, and the proposed legislation.
In the big picture, is there a way to provide BI insurance coverage related to pandemics?
With due care, BI coverage triggered by pandemics may be designed with a list of considerations in mind. Any specific program has limitations, “issues” and compromises in what it will provide and how much each stakeholder pays into it. We do not endorse any specific program or guarantee that any specific program would be workable or palatable to all parties.
The factors to be considered are:
- Uncertainty of frequency and severity of future pandemic events;
- Need for insurance industry limits and a federal backstop;
- Consideration of the methodology for distributing funds quickly but with consideration of the unknown total cost of the event while in the midst of it;
- Fair reimbursement of funds to insurers while in the middle of the pandemic;
- Limitations on the insurance industry’s ability to hold collected funds in reserve;
- Risk to value of assets held in reserve due to correlation of pandemic risk with market risk; and
- Need to balance affordability of coverage with potential benefits of the program.
What makes insuring a pandemic different from other extreme events such as terrorism (in TRIA) and hurricanes and floods (in the NFIP)?
A pandemic is very widespread, impacting a broad segment of the globe within the same defined event with a potential to have a widespread systemic economic impact. A large terrorism event or a particular flood or hurricane is localized. The impact, while significant for a single geographic, is not spreading to other areas. The more localized event allows for pooling of risk and diversification with other areas not experiencing the event at the same time.
What is a positive outcome for businesses, insurers, and the federal government with a pandemic reinsurance program?
The various stakeholders involved in a pre-specified pandemic insurance or reinsurance program will have the classic outcome of all insurance—i.e., replacing the uncertainty of economic loss with a more well-defined, orderly mechanism providing indemnification for loss triggered by a pandemic.
Is a pandemic reinsurance program affordable, and how would it be funded?
There is not a single way to fund a pandemic business interruption program. Any program needs to define what portion is prefunded by premiums paid by insureds and what portion is funded post-event by government. To be more specific, triggers and limits of coverage for the insured as well as the point where the government will be responsible for using its post-event funds need to be determined. Then in turn, the decision on how any governmental expenditures will be recouped, from the insurers and ultimately policyholders, needs to be specified. Only at that point will it be feasible to determine whether the resulting program is affordable to the various stakeholders—the insureds, the insurers, and the taxpayers.
If the federal government is the ultimate backer (as with the NFIP), what are some of the ways for a plan to pay the Treasury back?
Realistically, we need to consider that the size of the pandemic cost is uncertain and that we can build scenarios that have significant probability under which current and future premiums are unlikely to cover the expenditures of the U.S. Treasury. Legislators need to consider that if the program is set up like the NFIP—i.e., the policyholder pays premium directly to a governmental entity based on an “affordable” payment basis—that the pre-funded portion will not cover the costs, unless coverage is severely limited.
In various drafts of proposed legislation, the term “actuarial cost” for reinsurance is used. The Academy has noted that there is no basis for calculating either the frequency of future pandemics or the likely cost of BI losses due to future pandemics. Reference to “actuarial cost” was dropped from a later version of the bill, but it still appears the U.S. Treasury would sell reinsurance. How would that work?
Many of the details of how that would work are left to be determined outside of the legislation itself. We are in a position at the Academy to provide input as to the implications of various directions that the implementation can go. There is much more for us to think about and question. We have a group of volunteers looking into suggested boundaries and implications of alternatives.
The Academy’s leadership sent a letter to the National Association of Insurance Commissioners (NAIC) Blanks (E) Working Group reiterating concerns previously expressed to the NAIC on the proposed certification of continuing education by “appointed actuaries.”
The letter—signed by Academy President D. Joeff Williams, President-Elect Tom Campbell, and Immediate Past President Shawna Ackerman—described the likely inability of the Blanks proposal to meet NAIC’s previously stated aims, and the difficulties of relying on the proposed certification process to ensure continuing education compliance.
The Academy’s Committee on Property and Liability Financial Reporting (COPLFR) also submitted comments to NAIC’s Blanks Working Group, regarding proposed instructions for the 2020 P&C Statement of Actuarial Opinion.
The letter noted COPLFR’s specific concerns with respect to the need for, accuracy of, and potential misinterpretation of the proposed changes as currently set forth in the 2020 instructions, and noted that the definition of “Qualified Actuary” as provided in the current instructions already requires adherence to the U.S. Qualification Standards, which in turn require compliance with continuing education credit requirements.
The Committee on Property and Liability Financial Reporting (COPLFR) released frequently asked questions (FAQs) on financial reporting topics related to COVID-19. P&C Financial Reporting Considerations With Respect to COVID-19 was developed to assist appointed actuaries as they contend with the various uncertainties and challenges pertaining to loss reserving in light of the pandemic and related financial and regulatory developments. COPLFR expects to release periodic updates; email firstname.lastname@example.org with thoughts and questions for the committee to consider.
The Workers’ Compensation Committee released an issue brief in late June, Presumptive Benefits in Workers’ Compensation: Emerging Issues Before and After COVID-19.
The issue brief covers what workers’ compensation presumption of benefits means, how laws vary by state, what occupations are covered by presumptions, what injuries or diseases are classified as presumptive, who is eligible, how claims can be rebuttable by the employers, what are the cost elements of workers’ compensation presumptions, and other cost considerations.
It also covers recent developments, including the ongoing COVID-19 pandemic, and responses to post-traumatic stress disorder, and looks ahead at future issues confronting state legislatures, the workers’ compensation insurance system, public entities, and society at large.
Webinar Set for July 22
In conjunction with the issue brief, a webinar, “Workers’ Compensation: Impact of Covid-19,” will be held from noon to 1:30 EDT on July 22. David Heppen, chairperson of the Workers’ Compensation Committee, will moderate, and the speakers will be committee members Derek Jones and Frederick Ryan. Speakers will cover the effects of dramatic changes in the workforce, expansion of presumptive benefits for first responders and healthcare workers, consideration of the 2020 experience in the rate-filing process, financial reporting questions, and more. Register today.
The Cyber Risk Task Force sent comments to the Comptroller General who leads the Government Accountability Office (GAO) regarding cyberattacks and the Terrorism Risk Insurance Act (TRIA). Academy representatives including Senior P/C Fellow Rich Gibson also had a productive conference call following up with GAO officials in mid-June.
The letter noted cyber risk scenarios that insured losses were estimated to be a small fraction of the total economic losses. Contributing to this small fraction is the fact that the market for cyber insurance policies is still relatively immature, although capacity has been increasing, the letter stated.
“As the various challenges around the current coronavirus pandemic indicate, attempting to address any uncertainties after a large-scale event may prove to be much more difficult and will create additional stress in the financial system,” the letter said.
The Casualty Practice Council (CPC) hosted an April 23 webinar, “P/C Public Policy Update—Spring 2020,” which explored the impacts of the coronavirus pandemic on various property/casualty lines, as well as the latest updates on P/C public policy activity at the state and federal levels.
The presenters were:
Lisa Slotznick, Academy vice president, casualty;
Greg Frankowiak, chairperson, Automobile Insurance Committee;
Dave Heppen, chairperson, Workers’ Compensation Committee;
Susan Forray, chairperson, Medical Professional Liability Committee;
Kathy Odomirok, chairperson, Committee on Property and Liability Financial Reporting (COPLFR);
Senior P/C Fellow Rich Gibson;
Jeri Xu, vice chairperson, Extreme Events and Property Lines Committee;
Steve Jackson, Academy assistant director for research (public policy); and
Daniel Roth, past chairperson, Travel Insurance Task Force.
The presenters discussed proposed legislation affecting coverage of losses related to pandemic viruses; gave updates on federal legislation, including the reauthorization of the National Flood Insurance Program (NFIP) and the extension of the Terrorism Risk Insurance Act (TRIA); wildfires; and reviewed the latest on the Actuaries Climate Index (ACI) and the Actuaries Climate Risk Index (ACRI).
Slotznick opened by noting the “epic events associated with COVID-19” that have affected many lines of P/C insurance. She explained that this was a first look at what is currently known and what actuaries should be watching for as the pandemic continues to unfold.
In the Q&A, Odomirok addressed questions that have come up concerning how the coronavirus pandemic and related financial events might be reflected in revised reports on 2019 reserves and how 2020 midyear analyses might be affected.
Slides and audio are available to logged-in Academy members.
Cross-Practice COVID-19 Webinar Includes P/C Issues
Academy President D. Joeff Williams moderated a well-attended and well-received cross-practice webinar on April 28 regarding known and unknown risks and challenges actuaries may need to focus on that have been brought on by the COVID-19 pandemic.
The Academy’s four practice-area senior fellows presented, along with the chairperson of the ERM/ORSA Committee, who addressed risk management and financial reporting considerations. This cross-practice perspective is one that the Academy is uniquely qualified to provide to the profession at large given its broad base of members from all practice areas, as well as its mission emphasis on the public policy and professionalism aspects that touch the lives of all Americans through the work of our members.
GibsonSenior P/C Fellow Rich Gibson covered issues including general economic impacts, property/casualty line-of-business-specific issues and the impact on P/C actuarial practice, and legislative and regulatory challenges. He noted the favorable claim expense impact for select lines—the most obvious being automobile insurance, which is seeing fewer claims and offering policyholders rebates or credits—as well as the impacts for reinsurers.
A number of lines of business will be affected—in particular, auto insurance, workers’ compensation, and business interruption. Business interruption has been a focus since the shutdown and has raised a lot of questions about commercial insurance coverage. “There’s been considerable political and public pressure on this,” with a number of lawsuits being filed, he said.
Some of the P/C challenges for actuaries as they review emerging data include how to treat the “pandemic experience period,” measuring expected frequency and severity trends, and how predictive analytics and models that are currently in use are affected, Gibson said.
And in addition to state legislative proposals, federal legislation includes H.R. 6494—the Business Interruption Insurance Coverage Act—and the proposed Pandemic Risk Insurance Act (PRIA).
Slides and audio are available for logged-in Academy members.
The Actuaries Climate Index (ACI) was updated in May with new quarterly data, revisions to initial data for previous periods, and annually updated values for the index’s drought and sea level components.
The ACI is a measure of long-term changes across an array of observed weather extremes and sea level in Canada and the United States, expressed in units of difference (standard deviations) from the mean for a 30-year reference period from 1961 to 1990.
This release also includes revised data for previous seasons that have slightly lowered the index values for recent periods; however, the ACI’s five-year moving average continues its long upward trend, standing at 1.16 as of fall 2019.
The ACI—sponsored by the Academy, the Canadian Institute of Actuaries, the Casualty Actuarial Society, and the Society of Actuaries—is designed to provide actuaries, public policymakers, and the general public with objective data about changes in the frequency of extreme climate events over recent decades.
Public Policy Outreach
Related, Academy Senior Casualty Fellow Rich Gibson presented remotely on the ACI and the Actuaries Climate Risk Index at the Casualty Actuarial Society’s Virtual Spring Meeting on May 12.
Registration is open for the Academy’s 2020 Annual Meeting and Public Policy Forum, which will feature two highly respected speakers who will weigh in on this year’s elections, just days after they occur.
Noted presidential historian Michael Beschloss will be the keynote speaker. He will provide attendees with context and insights on the presidency and the presidents who have held the office—including the winner of the 2020 presidential election, to be held just two days preceding the Annual Meeting. Charlie Cook, a highly respected impartial analyst of trends in American politics and elections, will break down the political reality of how the historic elections played out, including an analysis of the congressional makeup.
P/C Breakout Sessions Set
COVID-19: Issues in Workers’ Compensation: Massive unemployment, millions working from home, presumptive benefits for first responders and essential workers. What does this mean for the workers’ compensation system and what are the public policy issues to be addressed?
Cyber Risk: Coverage continues to expand, the threat continues to evolve, and questions are raised about the Terrorism Risk Insurance Program.
COVID-19—Impact on Auto Insurance: Millions of workers stayed home, others were laid off, miles driven fell dramatically, the number of accidents dropped sharply, and insurers gave billions of dollars in rate rebates. Are these just temporary adjustments due to the pandemic or will we see long-term changes to the automobile insurance business?
The Annual Meeting and Public Policy Forum will be held Nov. 5–6 at the Fairmont Hotel in Washington, D.C. Continuing education credit will be available. Discounted early registration rates are now available—register today.
Register With Confidence for Academy Events: Cancellation Policy
The Academy is monitoring the ongoing coronavirus pandemic situation and adhering to the guidelines surrounding in-person events. As of now, we are moving forward with the marquee Annual Meeting and Public Policy Forum—and we also want our members to be able to register with confidence. The Academy now has cancellation policies in place to accommodate any necessary change to your registration resulting from a continuation of the current pandemic situation.
You can find the cancellation policy for the Annual Meeting registration page.
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