Latest Iteration of Pandemic Insurance Program Runs Headlong into Dodd-Frank
PRIA 2021 would transfer CFTC’s jurisdiction over swaps to state insurance regulators.
Representative Carolyn Maloney (NY) recently announced the reintroduction of the Pandemic Risk Insurance Act. The first version of this proposal, introduced in May 2020, largely borrowed from the Terrorism Risk Insurance Act.
This latest iteration boldly redefines the regulatory landscape established by Dodd-Frank in the wake of the 2008 financial crisis.
PRIA 2021 would require a commercial property insurer to offer “parametric non-damage business interruption insurance” either directly under its state insurance license or by joining a state-regulated “parametric insurance facility.”
Traditional property insurance only pays out if there has been an actual loss covered by the policy. For example, a traditional earthquake insurance policy might provide: “This policy covers loss or damage to your property caused by an earthquake during the policy period subject to a policy limit of $100,000.”
Parametric “insurance” pays a pre-set amount based on pre-defined parameters — even if the policyholder has not sustained a loss. A parametric earthquake insurance policy might provide: “This policy will pay $100,000 if an earthquake of magnitude 6.0 or greater with its epicenter no more than10 miles from 123 Main Street is reported by the U.S. Geological Survey during the policy period.”
As defined by PRIA 2021, a parametric non-damage business interruption insurance policy would pay if the policyholder became subject to a state or local government pandemic closure order. The policyholder would receive a pre-defined payout without the need to submit a claim or prove any actual loss resulting from the closure order.
A parametric contract may very well be an effective tool for businesses, non-profits, and local governments to manage the risks associated with future pandemic closure orders. A financial product does not qualify as state regulated insurance just because it is useful to manage risk.
In 2010, Congress tried to close gaps in regulatory oversight of financial products through Dodd-Frank. This legislation gave the Commodities Futures Trading Commission (CFTC) jurisdiction over “swaps.” Dodd-Frank defines a “swap” broadly to include:
Any agreement, contract, or transaction … that provides for … payment … that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.
As discussed in an earlier article, parametric “insurance” clearly falls within Dodd-Frank’s definition of a swap. Moreover, parametric insurance contracts that do not limit payout to the amount of actual loss fail to qualify for the traditional insurance exemption developed by the CFTC.
Congress conferred jurisdiction over swaps to the CFTC and, of course, it could take it away and hand it to state insurance regulators. If PRIA 2021 aims to do so, it must first amend the definition of swap in Dodd-Frank or repeal the prohibition of 7 U.S.C. 16(h) that a swap “shall not be considered to be insurance and may not be regulated as an insurance contract under the law of any State.”