Till now, the Coronavirus has taken away as much as 30% from the DOW Jones index since mid-February. Now a new insurance bill is being discussed in the Congress and its sanction can lead to another massive sell-off spree in the market.
Maxine Waters, the Democrat Representative proposed the bill insurance bill and the committee is considering the Pandemic Risk Insurance Act. The bill would force the insurance companies to compensate those businesses that have been hit hard or closed down during the Coronavirus period.
The businesses are indeed calling for financial support but if the insurance bill gets sanctioned, the stock market will witness another major melt shortly. This is because such a move will cost the insurance companies huge money and they will enter the “fire-sale” of stocks. Such an action will lead to a substantial drop in the DOW Index along with the entire US Stock market.
Billion Dollar payouts to be made by the insurance companies
Maxine Waters regard this bill as the same as the Terrorism risk insurance package. However, with such cash flow into the businesses, the overall economy is expected to be up and running according to the experts. All the lost and temporarily shut businesses would be paid as per a set cap by the insurance companies. However, the amount will still be huge and that will be a threat to the US Stock market.
If we take into consideration the Terrorism Risk Insurance Act, the insurers had to pay based on a capped amount of $100 billion every year. They were liable to pay 20% for every $100 billion, directly from their earned premiums then they had to again pay another 20% above the deductibles. The rest of the amount was paid by the government.
As of yet, the limits or the capped amount hasn’t been discussed but given the huge spread of the Coronavirus pandemic, this is going to be massive that’s for sure. As per trends, the US Marketing industry is all set to lose around $26 billion due to the Coronavirus depression.
The most suitable way for the insurance companies to meet such huge cash demand would to sell the stocks. With such an action, the price reversal will begin and there will be continuous bearish engulfment in the stock market in the coming days. The support level will turn into resistance and that is a big reason to worry for all the traders and investors alike. It is about time that this bill gets sanctioned and while business owners will rejoice, the stock market will become a bit gloomy!