Now that the longest and most damaging government shutdown in U.S. history is over (at least for the next few weeks), the lingering uncertainty that this will not happen again remains. While the shutdown can be claimed as a Pyrrhic victory for politicians, it is undoubtedly a major loss to the more than 800,000 federal employees and thousands of government contractors who have undergone financial duress as a result. Not being the last of the U.S. government shutdowns, where there has been 15 since 1981, the question of banning this draconian act altogether is gaining some support. Failing that, even though it would create a moral hazard, the Federal Government should shield furloughed employees through insurance. Here are the mechanics of how this would work.
Shutdown insurance would defray the political consequences therefore creating a moral hazard for politicians who ironically continue to enjoy their pay while furloughed federal employees struggle to make ends meet. The reality is that the moving parts of a government shutdown as well as the historical data, make a compelling actuarial case for insurers. To begin, certain esoteric classes of insurance, such as involuntary unemployment coverage, which went out of favor due to forced placement scandals, lend themselves well to these events – provided of course the insureds know they are covered and what they are getting into. This is particularly compelling for federal employees whose salary obligations are in effect guaranteed by the U.S. treasury. The challenge is to secure their cash flow during future government shutdowns, which are immanently outside of the control of any of the affected people. This meets a necessary precondition of insurance, which is that a covered claim would fall outside of the insured’s influence or control. It would also meet the principle of indemnification in insurance, which stipulates that people cannot profit from a loss, but merely made whole again.
Looking historically, the average duration of past government shutdowns has been less than 2 weeks. While this most recent impasse at 36 days is an outlier, it establishes an outer limit for how much income continuity protection would be required in order to provide a meaningful backstop to furloughed employees and their families. Unless politicians table legislation that bans this truly damaging activity in the first place, then the Federal Government has a moral and human resources obligation to arrange insurance for employees that will undergo expected future duress. The proposition of hard labor for free belongs in the annals of history, as does the tone-deaf advice that furloughed employees should barter their talent or have garage sales to cover their food, shelter and water.
As with all insurance programs, the preconditions of insurability include leveraging the law of large numbers, transferring pure risk and not speculative risk where people could profit from a loss, as well as triggering events for a claim that are outside the claimants’ direct control. A government shutdown insurance program could also incorporate time elements and maximum periods of protection, for example up to one month of income continuity at 100%, thereafter applied with a declining scale of income protection based on historical data. While this would give little comfort on the uncertainty now inherent in federal work and government contracting, it would enable affected employees to not endure unintended economic consequences. Especially at the hands of vindictive, partisan and deeply divided point scoring. No other advanced economy follows this arcane practice and the U.S. should follow suit.
Because shutdown insurance would tap existing insurance programs on the market, albeit it in a somewhat esoteric and miscellaneous category, underwriting and development of these programs would not require a ground up process. Similarly, in terms of premium payments for these programs and eligibility, models can be leveraged that would be partially subsidized by the sponsoring government agency that is most likely to be affected by future shutdowns, and partially subsidized by the pools of employees who are in effect in a shutdown’s crosshairs. In order to combat adverse selection where riskier groups are passed on to insurers and lower risk groups opt out, covered agencies would create an all-in approach, thus lowering the premiums per employee and ensuring underwriters are not saddled with certain losses or underwater in terms of financial reserves. The class of involuntary unemployment protection can also respond to other financial hardships potentially augmenting more traditional forms of income protection insurance, which typically respond to medical emergencies. A shutdown specific coverage add-on could cover broader events, interregna, employee relocations, agency reassignments, among others, that might produce temporary, if federally-backed, income interruptions.
Based on reports of the average affected employee’s salary gap during the shutdown, insurers would be on the hook (back testing to the longest shutdown) for an average of $5,000 per furloughed employee. This would equal a maximum liability of $200 million per workday for this past shutdown. While shutdowns have grown more common place with the advent of hyper partisanship (bordering on tribalism) over the last decade, the average event has not lasted longer than 2 weeks. Recognizing this, insurers could impose a waiting or elimination period before coverage takes effect of up to 2 weeks, which also would capture the pay schedule for most federal employees ensuring they can bridge any interruptions in income and keep their households and budgets afloat while the political dust up blows over. For a sector desperately looking for yield and yet so vital to humanity’s resilience, responding affirmatively to hard-working federal employees and government contractors with a shutdown insurance program can not only shore up employee confidence in the government, it can help shore up national economic resilience. Unless shutdowns are banned from now on, insurers and federal agencies should come together to fill this void.
