The Write Your Own Bailout Program (or Why TRIA Would Not Work for Pandemics)

Photo by Morning Brew on Unsplash

First published on March 25, 2020

The Terrorism Risk Insurance Act (TRIA) is based on a straightforward exchange:

• Insurers must offer to cover losses caused by a terrorism event in the same way they cover (or don’t cover) losses caused by a non-terrorism event; and in return
• The program promises to reimburse insurers for 80% of the terrorism losses they pay above individual insurer backstop deductibles.

For example, if an insurer would not cover the cost of cleanup from nuclear or chemical contamination caused by an accident TRIA does not require the insurer to cover the cost of cleanup from nuclear or chemical contamination caused by a terrorist attack.

A TRIA-like program for pandemics would presumably embody a similar deal. The problem with this approach is that even if insurers were compelled to withdraw their virus or pandemic exclusions:

• Most policies separately exclude losses from contamination whether from a virus or something else (note: the virus exclusion in use today was developed in 2005 as a clarification of the application of contamination exclusions to viruses);
• Civil authority coverage is typically not available based on a lockdown order intended to control the spread of disease; and
• If civil authority coverage did somehow respond, business income loss reimbursement often covers only the first 3 or 4 weeks after the first order goes into effect.

Large corporations found a way around this limitation in TRIA by setting up their own insurance companies, known as captives. Through these financial vehicles, large corporates can design and price their own terrorism insurance policies which often include hundreds of millions or billions of dollars in nuclear, biological, radiological and chemical coverages that are simply unavailable at any price to smaller businesses. See CBI-TRIA-20–03 for a detailed discussion of captive participation in TRIA.

Big business would presumably deploy a similar strategy for pandemic coverage. They could negotiate with themselves for pandemic policies covering payroll continuation for employees but also such benefits for shareholders and management as reimbursement of lost profits, stay-on bonuses for key executives, emergency automation to reduce reliance on employees and temporary relocation of operations to outside of the US. In other words, a large corporate would not need to negotiate with Congress for its next pandemic bailout — it could simply design, price and purchase one in advance from its own personal insurance company.

A pandemic insurance program is almost certainly necessary. However, TRIA is not an off-the-shelf solution that can be quickly fitted to any catastrophe exposure. The design of the make available requirement and program participation by captives are just two of TRIA’s features that should caution policymakers to first define clear policy objectives then understand what can be borrowed or modified from TRIA to realize them — and what should be avoided.