Reintroduced PRIA Legislation Would Provide Federal Backstop for Future Pandemics

Property-casualty insurers should consider the possibility of receiving federal support for losses, as well as coverage mandates, arising from future pandemics under new legislation proposed in Congress. The Pandemic Risk Insurance Act of 2021 (PRIA), introduced in the U.S. House of Representatives on Nov. 2, would establish a federal backstop for losses from pandemics and require property-casualty insurers to offer coverage for such losses. The legislation is similar to its predecessor bill introduced in the prior Congress (in 2020), which expired without action by that Congress, and is modeled on the Terrorism Risk Insurance Act of 2002, enacted in response to the Sept. 11 attacks.

The bill is motivated by the explosion of claims over the last 18 months under business-interruption and event-cancellation policies arising from COVID-19 lockdowns. Carriers have challenged many of these claims on the basis of policy exclusions, “physical damage” requirements and other policy terms. In addition, insurance carriers and regulators have cited the solvency risks to the sector that would result if the economic costs of lockdowns are broadly imposed on insurers that have not underwritten for such losses. PRIA would establish a federal reinsurance backstop to address these concerns. 

Sponsored by Rep. Carolyn B. Maloney (D-NY) (who also sponsored the 2020 bill), PRIA would not apply to COVID-19 itself, but to future pandemics. PRIA would principally do the following: 

• Establish, through Dec. 31, 2031, the Pandemic Risk Reinsurance Program (the Program) within the Treasury Department and empower the Secretary of the Treasury (Secretary) to administer the Program.
  
  
• Require each “insurer” to participate in the Program. (The bill defines “participating insurer” as an insurer electing to participate in the reinsurance facility, but, unlike the 2020 verion of PRIA, states that participation is “mandatory” and provides no procedure for election.)
  
  
  • “Insurer” is defined generally as an admitted or alien surplus lines insurer; an insurer approved for the purpose of offering property-casualty insurance by a federal agency in connection with maritime, energy or aviation activity; a state residual market insurance entity or workers’ compensation fund; and certain captives and other self-insurance arrangements, in each case where the entity receives direct earned premiums for any type of commercial property-casualty insurance coverage.
    
    
• Require each insurer to make available, in all its property-casualty policies, coverage for losses resulting from pandemics.
  
  
• Void any exclusion in a property-casualty insurance policy that is in force on the date of enactment of PRIA to the extent that it excludes losses that would otherwise be insured losses under the Program. Any state approval of such an exclusion would be void.
  
  
  • However, an insurer may reinstate a preexisting exclusion if the insurer has received a written statement from the insured that affirmatively authorizes such reinstatement or, for policies in effect for less than 18 months, the insured fails to pay any increased premium (up to 15%) associated with such coverage and the insurer provided notice, at least 30 days before the reinstatement, of the increased premium.
    
    
  • Nothing in PRIA affects state regulatory authority over insurance except that:
    
    
    • Any state definition of public health emergency is preempted if contrary to the definition in PRIA (which requires a determination by the Secretary of Health & Human Services and certification by the Secretary).
      
      
    • From the date of enactment of PRIA until Dec. 31, 2021, rates and forms for property-casualty insurance covered by PRIA filed with any state are not subject to prior approval or a waiting period under state law (except to the extent a rate would be excessive, inadequate or unfairly discriminatory). Where state law provides for such prior review or approval, a state may conduct “subsequent review” of a policy form.
      
      
    • Books and records of any insurer that are relevant to the Program must be provided to the Secretary upon request, notwithstanding any provision of state law limiting such access.
      
      
• Require each insurer to make available, in all its commercial property insurance policies, “parametric non-damage business interruption insurance coverage”; but an insurer may satisfy this requirement by arranging for such coverage to be made available by either an affiliate or a “parametric insurance facility” in which the insurer participates.
  
  
  • "Parametric non-damage business interruption insurance coverage" means insurance that compensates the insured for a portion of 180 days’ fixed costs and payroll, where coverage is triggered irrespective of physical status of the insured location and without need for proof of loss. Coverage would attach upon certification of a public health emergency and mandated closures of businesses similar to the insured.
    
    
  • A "parametric insurance facility" is a non-assessable joint underwriting association or pool approved by the Secretary to provide such coverage.
    
    
• Set the federal quota share of compensation under the Program at 95% of insured losses. The Secretary may, upon application by an insurer or parametric insurance facility, provide such insurer or facility with stop-loss protection for insured losses, for such price and on such other terms as the Secretary deems consistent with the purposes of PRIA. In general, such stop-loss protection may not have an attachment point lower than that provided in any catastrophe excess-of-loss reinsurance program that the insurer or facility has in effect for the same period.
  
  
• Require that an insurer's recoveries from other sources, taken together with financial assistance from PRIA, may not exceed the aggregate amount of the insurer’s insured losses for the calendar year. If such recoveries and financial assistance exceed insured losses, and there is no agreement between the insurer and any reinsurer to the contrary, the excess amount must be returned to the Secretary.
  
  
• Charge no premium to insurers or pandemic facilities during the “economic recovery period.” Thereafter, the Secretary (in order to encourage participation and to recover costs) may prescribe a rating plan for the quota share reinsurance provided by the Program for both the parametric non-damage business interruption insurance and other lines of property-casualty insurance.
  
  
  • The "economic recovery period" is the period beginning with the date of enactment of PRIA and ending on Dec. 31 of the fifth year following enactment. For any widespread pandemic occurring during this period, the economic recovery period would be extended until Dec. 31 of the fifth year following the certification of such pandemic.
    
    
• Authorize the Secretary to carry out the Program, including authority to investigate and audit all claims under the Program. The Secretary is called on to consult with the National Association of Insurance Commissioners (NAIC) concerning the Program.
  
  
• Require the Secretary to annually compile information on property-casualty rates for the preceding year. To this end, the Secretary may require each insurer to submit such rates to the NAIC, and the NAIC must make such information available to the Secretary. The Secretary must make this information available to Congress upon request.
  
  
  • The Secretary must, “to the extent possible,” contract with an insurance statistical aggregator to collect such information in an aggregate format that maintains confidentiality and does not permit identification of the particular insurer submitting such information. In addition, before collecting any information, the Secretary must coordinate with government agencies or publicly available sources to determine whether the information to be collected is available from such sources. Any information collected by the Secretary must be afforded confidential treatment; legal privileges are not waived by virtue of providing such data to the Secretary. The Secretary may make available to state insurance regulatory authorities information obtained under these provisions.
    
    
• Direct the Secretary to require insurers in each calendar year to submit to the Secretary such information regarding losses of such insurers resulting from covered public health emergencies as the Secretary considers appropriate in order to analyze the effectiveness of the Program.
  
  
• Require the Secretary to report each year to the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs on the effectiveness of the Program.
  
  
  • In addition, PRIA requires the Secretary to study and report on the particular challenges faced by small insurers. It also requires certain other studies and reports on specified aspects of pandemic insurance coverage from the President’s Working Group on Financial Markets, in consultation with the NAIC and industry representatives, and the U.S. Comptroller General.