The Federal Emergency Management Agency (FEMA) recently unveiled its National Risk Index (NRI) for natural hazards. The online mapping application identifies communities most at risk for 18 types of events. It visualizes the risk metrics and includes data about expected annual losses, social vulnerabilities, and community resilience.
Zuzak explained that the NRI draws from a wide range of data and analytics resources and considers the probabilities or frequencies of 18 natural hazards and the population and property value exposed. Expected annual loss is calculated separately for each hazard, then summed to generate a composite score for all 18.
NRI enables FEMA to talk with communities about specific risks, identify high-impact mitigation opportunities, and learn how they can make the best use of their risk-management resources.
“NRI wasn’t built in a silo,” Zuzak said. “We brought in local and county and state governments, tribal and territorial governments to make sure we had the best available data. We also brought in academia, nonprofit organizations, and private industry to make sure we had everyone’s input.”
Part of an effort to reduce costs and eliminate inconsistent risk assessments for planning, the NRI uses a national baseline risk assessment to identify areas that offer high returns on risk-mitigation investment. The NRI can help communities:
Update emergency plans;
Improve hazard-mitigation plans;
Prioritize and allocate resources;
Identify need for more refined risk assessments;
Encourage community risk communication and engagement;
Educate homeowners and renters;
Support adoption of enhanced codes and standards;
Inform long-term community recovery.
“Nothing like this – a free, consistent, comprehensive nationwide risk assessment tool that addresses multiple hazards and includes social vulnerability and community resilience – existed before,” said Dr. Michel Léonard, CBE, vice president and senior economist for Triple-I. “This is an important addition to the toolkit of risk managers, insurers, policymakers, and others working to create a safer, more resilient world.”
That the insurance industry alone can’t be expected to cover future pandemic risk seemed to be a given at yesterday’s hearings by the House Finance Subcommittee on Housing, Community Development, and Insurance.
But, as is so often the case, the devil is in the details.
The session – Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers – was chaired by Rep. William Lacy Clay. In his opening statement, Clay said, “It is not realistic or practical to expect the insurance industry to shoulder the astronomical cost of a global pandemic. The American Property and Casualty Insurance Association has estimated that paying all [COVID-19-related] claims, regardless of exclusions, would amount to $1 trillion per month.”
With respect to business interruption coverage claims currently being adjudicated, Clay referenced both the virus exclusions in most commercial property policies and the lack of “direct physical damage or loss” in COVID-19-related cases.
John Doyle, president and CEO of global insurance broker Marsh, testified on the importance of a public-private partnership to address pandemic risk, as well as to the need to “act now” on a solution for future pandemics.
“Acting now on a public-private pandemic risk solution will accelerate the economic recovery by reducing uncertainty,” Doyle said. “Moving forward, capital markets will seek assurances that companies have protection against prospective pandemic risk. The pace of recovery will depend upon the nature and degree of confidence in the marketplace.”
Doyle said the credit and power of the U.S. government is essential – “at the same time, I believe the insurance industry has a role to play.”
The Pandemic Risk Insurance Act (PRIA), introduced by Rep. Carolyn B. Maloney of New York, provided the jumping-off point for the testimonies and discussions of alternative proposals. PRIA, patterned after the Terrorism Risk Insurance Act (TRIA) put in place after the 9/11 terrorist attacks, was generally recognized as a good start – but several other structures were proposed to address perceived weaknesses.
One is the Business Continuity Protection Program (BCCP), advanced by the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA) and the Independent Insurance Agents & Brokers of America (Big “I”).
Brian Kuhlmann, chief corporate counsel for Shelter Insurance, speaking on behalf of NAMIC and APCIA, described BCCP as a program that “would provide straightforward revenue replacement for businesses and nonprofits of all sizes” using a parametric approach that wouldn’t require claims adjustment. Unlike traditional insurance, which pays for damage if it occurs, parametric insurance automatically pays when specific conditions are met – regardless of damage incurred.
Michelle Melendez McLaughlin, chief underwriting officer for the small commercial and middle market at Chubb, presented a “bifurcated” framework that would treat small businesses differently from mid-size to large corporations.
“Pandemics affect small and large businesses differently,” she said. The Chubb framework would cover small companies for up to three months of payroll and other expenses. Policyholders would be paid a pre-determined amount when the policy is triggered. “This provides policyholders with certainty that they will receive timely financial assistance after an event.”
For businesses with more than 500 employees, the Chubb proposal would create Pan Re – a federal reinsurance facility. “Private insurance companies that choose to sell coverage would write pandemic policies at market terms and retain some portion of the risk. The rest of the risk would be reinsured through Pan Re.”
R.J. Lehmann, senior fellow at the International Center for Law and Economics, agreed with other witnesses that the insurance industry isn’t equipped to handle pandemic risk alone. He went further to question whether insurance is the best structure for addressing this problem.
“Insurance is a system of risk transfer, not a system of economic relief,” Lehmann testified. “Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.”
The best argument for a public-private partnership, he said, is that insurers can help policyholders mitigate risks. “But it’s important to ask, ‘Mitigate the risk of what’? The risk you’re trying to reduce is the risk that a business will shut down. But, in a pandemic, you want businesses to shut down. We want them to have a safety net so they can shut down and survive.”
Hartmann counseled legislators to take their time and get the solution right, drawing from all the options that exist.
“Let’s be humble about how little we know, even about the current pandemic,” he said. “Get help to the businesses, workers, and communities who need it now. Don’t legislate for the next pandemic while we’re in the midst of the current one.”
I once took an Uber in Fairfield, Ohio. As we sat at a light, the driver pointed to an empty big box storefront.
“What’s that building look like?” he asked. I said it looked like an empty big box storefront.
“That’s right. You know where it went?” I said no, confused. He pointed down the street a few hundred yards away to a brand-new big box store.
“There it is. You know why they moved down the street? Taxes. Lower sales tax across the county line.”
I was reminded of that story of fiscal competition at its finest when reading about Apple’s recent decision to close two of its stores in the Dallas suburbs.
Or more accurately, as Ars Technica reported, Apple’s decision to close two stores within the federal court jurisdiction of the Eastern District of Texas. Rumor has it that Apple’s move could be in response to intellectual property litigation. Per Ars Technica:
The Eastern District is known for its extremely patent-friendly judges, and so for decades patent plaintiffs have set up shop there and sued defendants located all over the country. Prior to 2017, the law allowed a plaintiff based in the Eastern District of Texas to sue defendants there if defendants had even tenuous connections to the district. And, of course, a company of Apple’s size has business ties to every part of the country.
These plaintiffs are often called “patent trolls,” which the Electronic Frontier Foundation defines as companies or individuals that cheaply purchase patents (often “overbroad and vague” patents, at that) and then threaten expensive litigation against companies allegedly in violation of said patents:
These letters threaten legal action unless the alleged infringer agrees to pay a licensing fee, which can often range to the tens of thousands or even hundreds of thousands of dollars.
Many who receive infringement letters will choose to pay the licensing fee, even if they believe the patent is bogus or their product did not infringe. That’s because patent litigation is extremely expensive — often millions of dollars per suit — and can take years of court battles. It’s faster and easier for companies to settle.
The Eastern District has been a favorite venue for this kind of litigation – even after the Supreme Court sought to rein in so-called “venue shopping” in a 2017 decision. Ars Technica explains:
[U]nder the Supreme Court’s 2017 TC Heartland decision, a defendant can only be sued in a district where it “resides”—meaning where it was incorporated—or “has a regular and established place of business.”
Apple’s two stores in the Eastern District would likely count as “regular and established places of business” for patent-law purposes. So under the new rules, continuing to operate the stores makes it easier for patent plaintiffs to sue Apple in the Eastern District.
Apple has not confirmed that its move is related to patent-troll litigation. But, tellingly, the company is replacing its two shuttered stores with a new store…directly across the border of the Eastern District. Sometimes, the best offense is a good defense.
