What PPP tells us about a pandemic risk insurance program
First published April 23, 2020
Late last week the Small Business Administration released a breakdown of loans approved under the initial $349 billion funding of the Paycheck Protection Program.
As part of the loan application, an eligible business must certify the “[c]urrent economic uncertainty makes this loan request necessary to support … ongoing operations.” While we can have our concerns about the diligence that has gone into these certifications, the PPP seems to provide the best available indication of the environment in which any future pandemic insurance risk program would be expected to operate.
A few surprises emerge from this data, as detailed in the attached.
For example, a pandemic insurance program probably should be careful about linking coverage to a statewide stay-at-home order or order closing non-essential businesses. The Paycheck Protection Program experience suggests small businesses in states that issued such orders quickly and comprehensively made proportionately fewer claims under the program. In contrast:
- Businesses in the 10 states that never issued statewide mandatory stay-at-home orders will receive 13% of PPP loans although representing only 8% of the national population, 8% of national GDP and 7% of confirmed COVID-19 cases; and
- Businesses in the 12 states that never issued comprehensive orders closing non-essential businesses will receive 14% of PPP loans although representing only 10% of the national population, 9% of national GDP and 6% of confirmed COVID-19 cases.
From this data, it seems a pandemic risk insurance program triggering coverage based on the issuance of stay-at-home or business closure order would fall short of addressing actual need.
Similarly, it may be surprising that three-quarters of loans (but only 17% of PPP funding) will protect payrolls of no more than 36 employees. In fact, the average loan in this segment covers between 3 and 12 employees. Therefore, a pandemic insurance program may make the most of its resources by committing relatively small coverage limits for pandemic-related business income losses.
Finally, the magnitude of the Paycheck Protection Program — even before its funding nearly doubles in the next few days — is exponentially greater than anything the insurance industry has faced before. It is all but certain a pandemic insurance program would collapse under the weight of unrealistic expectations for the industry’s current products and capabilities. The insurance industry must redesign its business income coverages, simplify its claims processes and invest heavily in claims administration capabilities to have a chance of pulling off anything close to the scale of what the banks just delivered.
