The Chief Executive Officer (CEO) of the Insurance Information Institute (Triple-I), Sean Kevelighan, has warned that systematic strains would be placed on the insurance industry if carriers are forced to pay out retroactive claims.
As the fallout surrounding business interruption (BI) insurance related to the COVID-19 pandemic has persisted, leaders from across the industry have continuously opposed legislation seeking to force retroactive cover.
With business revenues suffering as a result of government enforced lockdown measures and the implementation of widespread social distancing, many looked to their insurer for assistance.
However, as has been well documented throughout the current crisis, the large majority of standard BI policies simply do not cover pandemics, owing to exclusionary policy wordings and the requirement of a physical trigger, such as a fire. While extensions would have been purchased in some instances, the amount is believed to be limited and overall, the general view across the property and casualty (P&C) sector is that BI losses will be manageable.
In response, legislative efforts in numerous states in the U.S. seek to force insurers to retroactively cover COVID-19 related BI losses, regardless of claim validity. This has been scrutinised across the risk transfer industry, with leaders warning that this wouldn’t threaten the stability of the insurance industry and undermine contracts.
Testifying before the House Small Business Committee’s Innovation and Workforce Development Subcommittee, Kevelighan reiterated these concerns.
“It would take a matter of months to put systemic strain on the insurance industry as a result of retroactive payment of contracts that honestly were never written in that way,” he said.
As noted by David Sampson of the APCIA, business continuity losses for small businesses as a result of the ongoing pandemic could reach up to as much as USD 431 billion per month.
Kevelighan highlighted the extreme stress this would put on the industry, warning of hundreds of billions of dollars of losses in a best-case scenario.
“Any efforts to retroactively rewrite business interruption policies are not only unconstitutional (Article I), but would imperil the insurance industry’s ability to pay covered insurance claims filed by American homeowners, drivers, and injured workers,” continued Kevelighan.
It’s also important to remember that retroactive payments could also affect companies’ ability to pay valid claims later in the year from natural catastrophe events, for example.
During the hearing, this point was raised by Rep. Tim Burchett: “We’re getting ready to go into hurricane season, there are going to be fires, there are going to be other disasters that we just, you know you can’t predict and I’m glad that we are all in agreement that we can’t go retroactive on this issue because it is unconstitutional and I think that would just bankrupt our insurance industry as we know it,” he said.
Adding, “And I’m wondering though if we do dampen our feet in a retroactive pool what’s going to happen when we come across some of these other catastrophes that are happening and that we know are going to happen and if the industry even survives if we do that.”
Kevelighan also commented on this issue: “You’re essentially taking premiums away from those Americans that paid for covered catastrophes. As we’re seeing right now we’ve got a very active tornado season. Another one of our non-resident scholars from Colorado State University who puts out the hurricane forecast has predicted an above average hurricane season.
“We’ve got waters right now outside the Florida coast that are in the 90 degree range which, if you go back in history, that looks a lot like the year of Katrina. I don’t mean to apply or make people worried about it but this is what the insurance industry does. We do disruption. We know how to cover for those claims that we want to help Americans. We’re actively doing that right now.”
Another point raised at the hearing, by Rep. John Joyce, concerned the potential for higher insurance premiums as a result of retroactive payments, as insurers look to recover losses that they did not collect any premium for.
“And at the end of the day, this would lead to premium increases for everyone. This would lead me to a serious concern. And in trying to do a short-term benefit here, it would lead to a longer-term significant harm of substantially higher premiums going forward. This is especially concerning as businesses are already severely struggling with cash flow as we try to reopen our economy,” he said.
Public and private sector entities are working together in numerous parts of the world to try and address the issue as it relates to both the current crisis and future pandemics.
Earlier today, insurance trade groups in the U.S. announced a proposal for an industry-backed federal program designed specifically to help businesses meet the financial challenges from future pandemic. And, according to reports, similar efforts are taking shape in other countries as they look to respond to the unprecedented and significant challenges being caused by the COVID-19 outbreak.
