Pandemic Risk Insurance Act of 2021 — The Numbers Don’t Add Up

PRIA 2021 creates unlimited taxpayer liabilities with no credible source of funding.

Representative Carolyn Maloney (NY) recently announced the reintroduction of the Pandemic Risk Insurance Act. The first version of this proposal (PRIA 2020), introduced in May 2020, largely borrowed from the Terrorism Risk Insurance Act (TRIA).

• A short summary of the proposed is available here.
• A discussion of the proposal’s conflict with Dodd-Frank is available here.

Uncapped Taxpayer Exposures

A simple comparison with TRIA and PRIA 2020 reveals the staggering financial commitment envisioned by PRIA 2021.

Under TRIA, U.S. Treasury is obligated to reimburse insurers 80% of covered insurance claims above an individual insurer deductible. If added together, individual insurer deductibles under the program total some $43 billion. Further, Treasury’s obligations are subject to a $100 billion cap (inclusive of insurer deductibles and 20% co-shares). Accordingly, an extreme terrorism event causing hundreds of billions of dollars in losses may result in reimbursements to insurers of as little as $45.6 billion. Because losses are unlikely to be spread evenly across insurers such that not all insurer deductibles would be fully exhausted, maximum program exposure is perhaps closer to $60 billion.

The first version of PRIA would have dwarfed TRIA. Under PRIA 2020, U.S. Treasury would reimburse insurers 95% of their pandemic insurance payouts subject to a 5% individual insurer deductible. The cap on Treasury’s obligations would have ballooned to $750 billion (inclusive of insurer deductibles and 5% co-shares). Under this proposal, a pandemic could cost the program as much as $700 billion, more than 10 times the maximum program exposure under TRIA.

PRIA 2021 towers over its predecessor. First, PRIA 2021 does away with individual insurer deductibles so that U.S. Treasury begins reimbursing insurers from first dollar. Second, PRIA 2021 removes the cap on Treasury’s obligations. The only limit on the amount of program payouts is the 95% rate of reimbursement. For every $1 trillion of pandemic insurance losses, the program would be on the hook for $950 billion.

According to the Pandemic Response Accountability Committee, the federal response to COVID-19 has exceeded $5 trillion. The Paycheck Protection Program and other small business programs account for nearly $1 trillion. Expanded unemployment benefits and direct assistance to individuals have each contributed $1 trillion. Support for state and local governments, schools, and farming makes up another $1 trillion.

To put the pandemic exposure into perspective, the maximum potential federal outlay under TRIA is only about 1% of what Congress has spent to get the businesses, non-profits, state and local governments, and families this far through the COVID-19 crisis. Even if the open-ended PRIA 2021 is meant to carry a fraction of this financial burden, it would easily rank as the largest single relief program ever implemented.

Unrealistic Funding Mechanism

Against trillions in foreseeable program losses, PRIA 2021 stands up a preposterously subscale funding scheme. Specifically, Treasury would charge commercial property and casualty insurance companies “to recover the cost of the reinsurance program over a period of not less than 5 years.”

The entire annual premium collected by insurers for the lines of businesses within the scope of PRIA is perhaps $250 billion per year with 98¢ of every dollar going to pay claims or cover expenses. Under PRIA 2021, every $1 trillion of program payouts would produce a bill to commercial property and casualty insurers equal to 40 times their operating profits every year for five years.

Of course, insurers would try to pass on those costs to policyholders. To recover $1 trillion on a $250 billion premium base (and assuming 15% acquisition cost), commercial property and casualty insurance premiums would need to double — and stay that way for five years. Few, if any, state insurance commissioner could be expected to approve rate increases on that scale.

The commercial property and casualty insurance industry simply could not absorb the cost of PRIA. Perhaps $350 billion of capital (policyholder surplus) supports the lines of business subject to PRIA 2021. Even if Treasury confiscated it all — leaving the industry bankrupt and out of business for good — no more than two of the five annual bills to the industry could be paid off.

Seen this way, PRIA 2021 is literally a death sentence for the U.S. insurance industry and to all those that depend on insurance to protect their employees, operate a school, or run a business.