It is well-known among insurance professionals, that until a loss occurs, most business owners care more about price than coverage.
If all of my insurance proposals during the last year had included a rider for pandemic business interruption insurance, I believe less than 5% of the buyers would have considered it. Obviously, it’s a decision involving the trade-off for the premium charged vs. the perceived risk in the buyers’ minds, and my educated guess is that such coverage would have been relatively expensive.
As insurance professionals, we offer Terrorism coverage to every risk, every year. Less than 1% of the buyers purchase the coverage, even though the premium is very modest. Earthquake coverage is offered every other year to California homeowners, and though the risk of loss is much higher than a loss from terrorism, most still don’t buy the coverage—it’s pretty expensive on top of a high deductible.
And now we have a nationwide political business suspension, that looks a lot like something that should be covered under Business Interruption insurance on a commercial insurance policy—but insurance companies are denying claims. Why?
First, in order to trigger a business interruption claim, it must result from a covered property loss. If the building is damaged by fire, the resulting interruption of business would be covered by the policy, assuming the policy was formulated to include it, almost always the case. But COVID doesn’t “damage property” and is therefore not a property loss; thus the business interruption part of the coverage is not triggered, and a covered loss does not occur.
Second, some believe that it may be a “civil authority claim”—companies are not allowed into their places of business because they are prevented from doing so by a civil authority. That makes sense—except that the cause of the civil authority action must also be damage to property. Going back to the fire example, because of a fire in the building a business occupies, though experiencing no property damage, local authorities have forbidden return to the business premises for normal activity. In that case, it would be a covered business interruption loss by order of civil authority. But in the case of COVID-caused losses that didn’t cause property damage resulting in the action by a civil authority, there is no valid business interruption claim.
Third, since SARS and other more recent epidemics, many insurance companies have adopted policy language, approved by state insurance departments, that have specifically excluded coverage that results from “virus or bacteria.” In theory, various state approvals of the language would imply that States’ insurance departments considered the language to be reasonable.
Each State has an active insurance regulatory apparatus whose purpose is enforce professional behavior and ensure the financial soundness of the companies licensed in its state. In my opinion, such regulators would be ill-advised to renounce the importance of their normal regulatory functions and destroy the capital underpinnings of the firms they are regulating for political expediency.
If this was baseball, that’s three strikes, and you’re out! But it’s not baseball—it’s the American legal system, whose creative minds have never seen a contract they couldn’t imagine co-opting. Add to that, politicians on both the State and Federal level are attempting to introduce legislation to require that insurance companies change their policy language retroactively and pay business interruption claims for affected businesses.
What would happen if such a bill were passed? The consequences would reverberate far beyond the insurance industry, and far into the future. How can businesses make agreements and draw up contracts if the contract language can be forcibly reformed at any time?
But let’s just stick to consequences to the insurance industry. Doing some back-of-the-envelope calculations, a quick google search indicates there are 32.5M businesses in the US. Let’s say that the average business loses $25,000 in revenue over the two-month period of shutdown, the math totals $812.5 Billion. One could easily see this being a $1T claim depending on the average of all claims made.
To put this into perspective, according to Google, “the attacks on Sept. 11, 2001 totaled $31.6 billion in costs for the insurance industry when taking all claims into account. Feb 9, 2020″ Thus, the potential for loss would be 30 times greater than the 9-11 losses.
If so, then what? According to the Insurance Information Institute, the total cash and invested assets of Property & Casualty insurance carriers in the US in 2018, was $1.7 Trillion. COVID business interruption losses could easily bankrupt even the best-run insurance companies.
Insurance company reserves are actuarially set for known and anticipated future losses. Even catastrophe losses are built into the rates with reinsurance contracts in order to maintain balance sheet integrity during tough times. Hijacking those reserves for COVID, a completely unanticipated and political catastrophe, would leave the cupboards bare for future anticipated losses.
What would the side-effects be for likely industry-wide bankruptcies? When insurance company capital reserves are reduced, their ability to take on insurance risks is reduced. In this case, with the potential of insurance company reserves being completely wiped out, those companies that weren’t in default would be seriously constricted in the risks they chose to underwrite. Policies for businesses considered to be riskier would see premium increases, and in some cases cancellations. As the insurance music slows or stops, many businesses will be left without a chair.
What does this mean for the future of actuarially sound insurance pricing? How do actuaries price for the political risk of a future lockdown?
I might also add that this issue doesn’t just affect the insurance industry; it has the potential to affect every part of the economy. People and financial organizations don’t invest in companies that don’t have insurance. In that sense, insurance is antecedent to banking. The economy would grind to a halt without a healthy insurance industry.
Extreme caution is called for before dismantling the insurance industry for short term political gain. The consequences would be far worse for the business community than two months of revenue reimbursement.