Good morning Chairman Clay, Ranking Member Stivers, and members of the Subcommittee.
My name is
As the world's leading insurance broker and risk advisor, Marsh & McLennan has a particular expertise in pandemic risk. We have a longstanding involvement with the
The ongoing COVID-19 pandemic has affected us all, personally and professionally. And while the pandemic is first and foremost a human tragedy, we are deeply concerned about its impact on the economy and our clients. Helping clients manage risk is our core business, and today we are here to give voice to our policyholders. I'd like to emphasize that point: Our role as an insurance broker is, first and foremost, to be an advocate for our clients.
Why we need a pandemic risk solution now
Pandemics are by definition global in nature, which means that clients and insurers cannot diversify against them in the way that they might with other local or regional catastrophe risks. And the stakes for policyholders — and these include businesses of all sizes and sectors, educational institutions, non-profit organizations, public entities, and more — regarding pandemic risk are too high to defer action. At Marsh & McLennan, we believe there is a need to:
1. Establish, by working with
2. Create greater certainty for businesses and their employees during a recurrence or future pandemic. This can be achieved by providing greater clarity in program policy coverage.
3. Facilitate clients' access to capital from lenders
4. Enhance the resilience of the US economy and its capacity to bounce back more rapidly from a future pandemic event. This includes linking risk mitigation to premiums, or price and coverage could be impacted by the steps a business takes to meet certain mitigation requirements. A federally backed pandemic risk insurance program should encourage improvements in health and safety practices.
5. Support greater investment by the insurance industry, as well as the government, in data collection and modeling tools to help insurers, brokers, and businesses to anticipate and quantify potential risks.
We can create a workable solution
The insurance industry has a strong track record of helping businesses of all sizes mitigate critical risks, including natural catastrophes, workplace hazards, cyber threats, and more. That institutional knowledge and expertise can be used to help businesses understand and manage pandemic risk.
We believe a public-private partnership with the right incentives for all parties is the best option to mitigate the potential future economic impacts of pandemics, and accelerate economic recovery from COVID-19. We understand that the attributes of pandemic risk cannot be compared equally to other risks, such as natural catastrophes or terrorism, but the process for developing a solution for pandemics is comparable.
We use the following principles to guide our thinking about how to create a workable solution:
* Risk Mitigation and Resilience: How should the scheme's design embed measures to encourage resilience in the community — for example, by incentivizing preventative measures on the part of insureds, by investing pool reserves in resilience initiatives, or by linking the scheme to ongoing government commitments to building resilience in the system.
* Funding Model: Could the public private partnership facilitate increased private market participation over time with the appropriate level of industry commitment.
* Scope of Coverage: Should coverage be compulsory to offer, and sold as a standalone product depending on the client segment, and should it be compulsory at some level to purchase coverage.
* Distribution and Operating Model: A solution must contemplate the infrastructure required to operate the scheme on an ongoing basis, and the technology necessary to meet its objectives.
* Claims Process: A solution must include a well-defined trigger that defines relevant thresholds and specifies how and when claims are paid.
SECTION ONE: Pandemics In Context
With that, let me offer a brief view on the nature and trajectory of pandemics. Going back to the Spanish flu just over 100 years ago, the world has witnessed many outbreaks, epidemics, and pandemics. The Spanish flu caused as many as 100 million deaths; other outbreaks have killed fewer, but brought billions of dollars of economic damage.
Despite advances in medicine and health care, the frequency and potential severity of infectious disease has increased over time. The ease of global travel, urbanization, and land use changes all make it easier for disease to spread. Just since 2003, we have seen outbreaks of SARS, Swine Flu, MERS, Ebola, Zika, and now COVID-19.
At the same time, global supply chains and economies have become increasingly interconnected. This makes the potential economic disruptions from a pandemic far greater today than in the past.
Indeed, the economic damage from COVID-19 has been immense, measured in trillions of dollars in the US alone, as organizations, states, the federal government, and other countries have implemented a variety of measures to try to slow the virus' spread. As noted in the report that we provided in the appendix to our testimony, some industries — such as manufacturing, health care, travel, and entertainment — have been especially hard hit. But every industry has been affected.
It is this widespread economic damage from COVID-19 that has us here today.
We see three particular ways in which COVID-19 has been more complex than past epidemics and pandemics:
1. It was sudden and spread quickly. Within 60 days of the first case being reported in late December, nearly a year ago, the virus had spread to more than 50 countries, according to the
2. The ensuing economic downturn was driven not by a reduction in supply and demand, but by concerted actions from governments to curtail social interactions and other activity.
3. The interconnectivity and interdependence of global supply chains exacerbated the impact of the steps aimed at stopping the spread.
For these reasons and because we are witnessing an increase in the number of outbreaks, Marsh believes that creating a public-private pandemic risk solution can instill confidence in businesses, accelerate our economic recovery, and provide needed protection against future pandemics. A pandemic risk insurance program is essential for all of our policyholders, no matter their size.
The credit and power of the US government is essential to create a risk program to harness the financial and social benefits of insurance to mitigate pandemic-related economic losses and provide greater certainty about a sustained recovery.
At the same time, the insurance industry has a role to play.
SECTION TWO: Impact on the Availability and Affordability of Insurance
One of the main questions you may have today is: Are pandemics insurable? The question has sparked considerable debate and, like the pandemic itself, the answer is complex. The last several months have demonstrated that traditional insurance solutions — and the commercial insurance market — cannot fully provide businesses and others with the protection they need from the enormous costs of pandemics.
The reality is that pandemic insurance has existed for a long time, but is rarely purchased, given its cost and the low likelihood of an event. Oftentimes, various insurance policies explicitly exclude pandemic risk. The reason for that is grounded in both math and psychology: The payouts, while sporadic, can be so enormous they dramatically exceed insurers' capacity to bear them.
On the math side, most insurance policies cover events like a fire, which may affect a single property, or like a hurricane or earthquake that may impact a region. Pandemics can affect the entire world, which boosts the potential cost of insuring them exponentially.
On the psychology side, pandemics are rare, and policyholders are reluctant to buy insurance against a risk that hasn't occurred in decades, or that seems theoretical.
Despite that, many companies are now looking to their insurance policies for help with the ongoing financial loss from COVID-19.
Even without specific pandemic insurance in place, insurers will undoubtedly pay out tens of billions of dollars in COVID-19-related losses. Nevertheless, some policyholders will be disappointed.
The last several months have demonstrated that there may be significant limitations regarding the extent to which property and liability policies respond to pandemic-related losses. While some specialty polices may include coverage for pandemic claims, the vast majority of policies do not explicitly cover this risk. And, given the specific and extensive effects of COVID-19, many insurers have started to exclude pandemic risk and communicable disease risk going forward.
I'd like to highlight a few forms of standard coverage for you, to provide an indication of the many challenges policyholders face. As with any discussion of insurance coverage, it's important to note that the specific language in individual policies will ultimately determine any COVID-19 or future pandemic coverage.
Perhaps the most contentious area of insurance related to the pandemic at this time involves business interruption coverage, which is typically also one of the greatest areas of need for policyholders in a disaster. Put simply, this is the coverage that policyholders seek from their property insurance for financial losses incurred due to a disaster such as a fire, a hurricane, or an earthquake.
Marsh clients globally have made more than 11,000 business interruption claims related to the pandemic.
But most property policies have terms that preclude coverage for COVID-19 related losses. For example, they may say that there has been no physical loss or damage to trigger coverage, that fear on the part of the public does not trigger coverage, or that a “contamination” exclusion prevents coverage.
There are arguments in favor of policyholders that Marsh and others have been advocating since the COVID-19 outbreak began, most of which stem from policy language that could be mitigated through a dedicated line of pandemic coverage. But as litigation arises, it may be months, or even years, before issues are ultimately resolved.
And even where insurers may have provided coverage in the past, many are now reducing or eliminating coverage, regardless of pricing and terms, leaving fewer options for insureds.
Another area of concern is event cancellation coverage. Available capacity for this risk was already on the decline in 2019. COVID accelerated that trend. We have seen a 25% reduction in insurance market capacity over the last two years. Efforts to slow the spread of the virus included canceling thousands of events, from mega-events like the 2020
The last coverage area I'll touch on today is workers' compensation insurance.
Although workers' compensation statutes and case law can vary by state, compensability generally requires that an illness or disease be “occupational.” As COVID-19 has spread, it has become increasingly difficult to determine whether an employee has contracted the illness in the workplace.
Whether a specific case is compensable will be determined by the facts established during an investigation of the claim, as well as the governing law in the jurisdiction where the claim is reported. As of today, at least 20 states have introduced COVID-19 related workers' compensation laws and regulations, including some that shift the burden of proof from employees to employers for claims in select occupations.
Because insurers cannot explicitly exclude occupational illnesses as a result of communicable diseases from their workers' compensation policies — and because employers are required in nearly all states to purchase workers' compensation insurance — the options for buyers could become limited amid future outbreaks, epidemics, and pandemics.
SECTION THREE: The Role of Public-Private Insurance Partnerships
The complex nature of pandemic risk means that we need strong, national pandemic risk management. This requires insurers, backed by the federal government, to write pandemic insurance policies and brokers to contribute our risk knowledge and infrastructure. Widespread pandemic coverage would make the insurance sector the first line of economic response in future outbreaks.
Indeed, I would argue that we need to position the insurance sector at the forefront of efforts to help prevent the next pandemic. Key to building a more proactive and agile response to the next pandemic will be an insurance and risk management partnership that helps facilitate coverage and aligns the needs of insurance buyers and insurers to avoid losses while incentivizing pandemic risk preparedness and mitigation.
Recent history provides examples of just how this has been accomplished. A range of risk-pooling models — from pure private partnerships to state-financed funds for non-insurable risks — can be used to address difficult risks.
Although circumstances between pandemics and terrorism differ, the Terrorism Risk Insurance Act, or TRIA, provides one example for such a public private partnership. Before the attacks of
In the aftermath of 9/11, reinsurance for terrorism risks was withdrawn and commercial insurers stopped covering them. Insurers' general view at that point was that the risk of loss was unacceptably high, unpredictable, and difficult to price. In
The federal backstop created by TRIA — and reauthorized several times since — has enabled a more resilient society. It created a viable commercial insurance market for terrorism, and it provided much-needed assurances to lenders — without which commercial property development would not be possible — and helped stabilize the overall economy.
And as you can see in the chart in Marsh's Pandemic Risk report regarding existing risk pooling structures, there are other examples: crop insurance here in the US and a variety of government-backed pools in other countries. At Marsh & McLennan we have been a party to the formation and ongoing support of most of these facilities around the world and understand the rationale as to why and how each of them have been structured and how they help policyholders.
If we create the right economic incentives for insurers, policyholders, and the government, insurance can serve its traditional function of mitigating risk. Over time, the right risk program can spur new technologies, ways of working, services, insurance products, and processes to ultimately chip away at the enormous losses associated with pandemics. That, in turn, can help make pandemic risk more manageable and enable our economy to build the necessary resilience it needs for the future.
Over the past few months, there have been a number of proposals for addressing pandemic risk.
We need the market dynamics of the private insurance sector to help promote risk mitigation strategies and actively engage policyholders through education and incentives to lower their risks.
Engaging private capital as part of a potential solution can incentivize an effective long-term outcome. For example, under TRIA the government did not assume all financial responsibility. Insurers wrote terrorism policies, businesses improved their security practices, and the country became more resilient to the threat.
For pandemics, the financial commitment from the insurance sector at first will need to be modest as capital is already committed to support other critical risk areas like hurricanes, earthquakes, terrorism and cyber. In addition, the ability to assess the frequency and severity of pandemic risk is relatively unknown and managing the accumulation of the globally correlated exposure is difficult as this exposure impacts all lines of insurance and geographies.
Over time, if the program is structured effectively with the right incentives to mitigate the risk, we would anticipate a gradual transfer of an increasing stake in this risk to the private sector.
Many people in the insurance industry believe pandemic risk is best managed through a standalone policy using what is known as a parametric trigger, which is index-based with a predetermined payout mechanism that triggers according to predefined parameters. The policy would provide a predetermined fixed limit, which would cover essential operating expenses, such as wages and/or rents for a period of one to three months following a governmental order to shut down business or a stay at home order.
The policy limits would vary by customer segment and pricing could be influenced by risk mitigation measures that insureds enact. This type of approach would enable the efficient dissemination of funds to ensure business continuity in the event of another pandemic.
A number of other proposals have been put forward by insurers, policyholders, and trade groups. For example, the recently formed
The BCC advocates for the development of a public/private business continuity insurance program to help businesses protect their employees' jobs and limit future economic damage from pandemics and other national emergencies. The group consists of organizations from industries including restaurant, entertainment, film, hospitality, gaming, communications, broadcasting, health care, and the apartment, industrial, office, and retail real estate sectors. BCC's members include the
Marsh & McLennan agrees with the BCC that the key to building a more proactive and agile response to the next pandemic will be an insurance and risk management partnership that helps facilitate coverage, aligns the desires of both insurers and policyholders, and requires mitigation practices.
You will find a brief comparison of various proposals in the appendix to our testimony.
SECTION FOUR: The Time to Act is Now
There are some suggesting that
At Marsh & McLennan, we see three broad areas that make us feel strongly that now is the time for a public-private pandemic risk solution.
First, acting now will accelerate economic recovery by reducing uncertainty. Moving forward, lenders will seek assurance that companies have protection against prospective pandemic risk. The pace of recovery will depend on the nature and degree of confidence in the marketplace.
Second, it will provide financial protection against future pandemics, in part by absorbing some of the initial financial shock of a pandemic. Insurance coverage enables businesses to retain employees and meet financial obligations through the peak of uncertainty.
Third, acting now works to bend the risk curve. Insurance creates the right economic incentives to drive change in society, and acting quickly will help to harness risk management to build a more resilient US economy.
Delaying may slow the pace of recovery as lenders and investors fear the absence of a safety net for the next pandemic.
There is also a need to break the panic-neglect cycle around pandemics: A disease arises, there is a momentary flare of concern, followed by action and funding, then the disease dissipates and attention moves to other problems.
Acting now will aid economic recovery, provide confidence to businesses, and enable them to do what they do best: be entrepreneurial, take risks, and rebuild the world's economy. Our view is based on experience with past events, including 9/11, after which
To summarize, the reality is that our world is highly and increasingly interconnected. Epidemics and pandemics are more frequent, and the potential economic ripples for our clients are truly immense, as we are seeing with COVID-19.
As we work our way through the current pandemic, there are risk mitigation steps that we can, should and, indeed, are taking.
As we manage through the financial implications of additional waves of COVID-19, we must also strengthen and better coordinate a global event monitoring system. We can't wait but must act now to help companies anticipate and plan to better manage the risks of future epidemics and pandemics.
The complex nature of pandemic risk necessitates close cooperation by the public and private sectors in managing its impacts and restoring confidence in the functioning of markets, economies, and society. The key to building a more proactive and agile response to the next pandemic will be an insurance and risk management partnership that helps facilitate coverage, aligns the desires of both insurers and policyholders, and requires mitigation practices. An efficient and effective pandemic insurance program will accelerate recovery and build resilience.
Over the past several months, we have engaged in many discussions regarding the need for a public private partnership to insure pandemic risk. Our clients and companies represented by groups such as BCC, employ tens of millions of Americans, and they've expressed to us that a solution must be implemented now to help manage future shock events.
COVID-19 made clear that we all underestimated our susceptibility to a pandemic and the toll it could take on the global economy. Like terrorism and massive cyber-attacks, pandemic risk is too big for the private sector to manage alone, and too important to ignore.
A strong pandemic insurance system can make the country more resilient to the risk and build confidence about our future.
Thank you and I look forward to taking your questions.
Read this original document at: https://democrats-financialservices.house.gov/UploadedFiles/HHRG-116-BA04-Wstate-DoyleJ-20201119.pdf