The case for national disaster insurance

Popular anger is brewing at Washington’s haphazard approach to propping up the economy. Too many funds intended to rescue small businesses were instead scooped up by large firms and others that have been little affected by the present crisis. Meanwhile, small businesses that succeeded in obtaining government assistance are discovering it cannot be used to defray much of their existing fixed costs, not to mention the increased costs for PPE to keep workers safe even as revenue plummets. Once again, a hastily designed government program is unfairly picking winners and losers.

There’s a better way to do this.

We propose establishing a national program of what we call “macroprudential economic interruption insurance.”

Large-scale economic disasters, including pandemics, are rare — but they do happen. The Centers for Disease Control introduced social distancing as a key intervention in 2007. Yet, no accompanying plan was ever developed for shuttering the economy. That gap must be filled, especially since planning now for the next crisis will provide tools to deal with the present one.

Macroprudential economic interruption insurance would be specifically designed to manage the costs associated with a forced shutdown of normal commerce. It should have three components:

First, enable businesses to purchase comprehensive insurance coverage for widespread economic interruption at an affordable price. Insurers confronted an analogous situation with respect to underwriting terrorism risk following the 9/11 attacks, when Congress passed the Terrorism Risk Insurance Act (TRIA). This model has proven effective in assuring availability of federally backed terrorism risk coverage for companies, while mandating loss-sharing with the private sector to encourage sound underwriting.

A similar approach, called the Pandemic Risk Insurance Act (PRIA), is currently under review by the U.S. House Committee on Financial Services.

Much as with terrorism insurance, not all sectors carry equivalent pandemic risk. As well, some firms may find they can take actions — such as robust work-from-home policies or staggered work schedules — that would help limit exposure, allowing an insurer to reduce pricing. We believe that with the right policy design, insurers could develop coverage and deductible categories. An alternative would be for the government to underwrite 100 percent of the loss risk, relegate insurance companies to an administrative function and allow them to compete solely on cost and service.

Whatever the ultimate role for insurers, it is crucial for the government to provide a mechanism for companies to choose whether they want to pay for protection; those who forego the cost would be forced either to make other arrangements or face the consequences.

Second, establish a limited insurance program that will provide a safety net for the affected employees and vendors of these businesses. This is necessary because the failure of companies that elect not to purchase sufficient coverage otherwise imposes enormous collateral damage on the rest of the economy.

This approach of providing a broad-but-limited economic “safety net” is similar in philosophy to the role of the Federal Deposit Insurance Corporation (FDIC). Everyone is better off if nobody believes that a bank failure will put savings at risk. The same logic holds for large-scale economic interruptions: When everyone knows a sufficiently sized, universal level of payment support is in place, business managers and consumers will be able to spend with more confidence — keeping the economy in motion for the benefit of all.

Analogous to the FDIC, this program would operate as a payer of last resort, temporarily covering senior debt payments, employment costs, and vendor invoices up to an established level. Crucially, the resulting clarity would enable bankruptcies to be worked out in an orderly fashion, reducing the need for the Federal Reserve to step in with near-boundless economic backstops.

Third, supplement unemployment insurance programs to provide more direct assistance to affected employees. While the Coronavirus Aid, Relief, and Economic Security (CARES) Act seeks to do this, the unemployment provisions are both temporary and arbitrary.

The unprecedented speed and magnitude of the crisis has exposed the limitations of existing technology systems employed by states, delaying payments and paying some workers more than their prior incomes. Establishing a consistent set of benefits applicable to economic interruptions would enable states to preconfigure their systems, decreasing processing time and providing for more efficient benefit structures.

Though this proposed program may appear costly, the present crisis demonstrates that the federal government was already going to assume responsibility for covering this exposure — it simply had not accounted for it yet. Today, these costs are embedded in a recovery program that now exceeds several trillion dollars. A well-structured program would acknowledge this existing responsibility in a more efficient, equitable and transparent manner.

Preparation today can alleviate turmoil and expense tomorrow. We should act now to implement policies that provide greater economic certainty for both the current crisis and the next one to come.

Patrick Wolff is an investor, the founder of Grandmaster Capital Management and former managing director at Clarium Capital Management and Thiel Macro; he is also a chess grandmaster, and two-time U.S. Chess Champion in 1992 and 1995. Jason Tepperman is the managing director of PLC Fund Advisors LLC, a specialized small business lender, and previously served in multiple roles with the U.S. Treasury Department. They are coauthors of “COVID-19 Policy Response Proposal: Macro-Prudential Economic Interruption Insurance,” a policy brief published by the Mercatus Center at George Mason University.