As more and more international organisations underscore the potential negative ramifications of forcing insurers to retroactively cover COVID-19 related business interruption (BI) claims, the President and Chief Executive Officer (CEO) of the American Property Casualty Insurance Association (APCIA), David Sampson, has again highlighted the importance of stability in the marketplace.
As the COVID-19 pandemic unfolded and an increasing number of businesses across the world either went remote, significantly curtailed activities, or in some instances, ceased operations entirely, the potential for substantial BI claims has been a constant debate across the re/insurance industry.
It’s been well documented that, for the most part, BI policies require a physical trigger element, such as a fire, in order for the claim to be valid, while the terms and conditions of many standard BI policies explicitly exclude outbreaks of infectious disease.
Of course, some will have purchased extensions to cover pandemic risks, while in other, more ambiguous cases it’s likely that policy wording will be scrutinised as insureds seek financial protection at a very distressing and challenging time.
Overall, it’s expected that the ultimate BI losses will be minimal as a result of policy wording and exclusions, although, analysts have noted that losses could increase should courts side with policyholders.
In an effort to assist policyholders, in certain parts of the U.S., for example, legislation is seeking to force insurers to retroactively cover COVID-19-induced BI losses regardless of any exclusions. Such legislation, which ultimately means insurers would be paying for losses for which they have collected no premium, has been met with scrutiny by the insurance and reinsurance industry.
Towards the end of March, Sampson of the APCIA warned that forced covers in the U.S. could have a serious impact on the insurance industry’s stability, impacting companies’ capital levels and ability to pay for valid claims from non-COVID-19 related losses, such as hurricanes.
He later warned that business continuity losses for small businesses as a result of the COVID-19 pandemic could reach between USD 255 billion and USD 431 billion per month, which is far higher than monthly commercial property insurance premiums.
Recently, other industry analysts have also commented on the potential impacts of forced coverage.
Ratings agency A.M. Best has said that if carriers were forced to pay for two months of retroactive coverage on COVID-19-related claims, industry capital backing re/insurers writing BI could decline by as much as 50%.
And earlier this week, the International Association of Insurance Supervisors (IAIS) also commented on the issue, warning that the implementation of this kind of legislation could “create material solvency risks and significantly undermine the ability of insurers to pay other types of claims.”
In light of the recent announcements from A.M. Best, the IAIS and state insurance regulators in the U.S., Sampson said: “The IAIS has joined AM Best and state insurance regulators in underscoring the broad, negative repercussions of public policy proposals to require retroactive insurance coverage on COVID-related claims.
“These proposals could impact the financial ability of insurers to meet their everyday promises to families, individuals, and businesses. Insurance industry stability is especially important in a time of increased natural catastrophe frequency, with flood season underway, hurricane season around the corner, and wildfires posing year-round risk.”
