COVID-19 is an earthquake; its impact puts huge strains on our health and livelihood. Insurers have a critical role to play in helping businesses and their employees to get through this emergency and bounce back strongly at the other end. Proposed state legislation extends business interruption liabilities for smaller companies beyond the coverage provided in their policies. Without a full understanding of the potential costs of this extension, will the proposed legislation turn the COVID-19 earthquake into a tsunami of unforeseen claims and costs? If so, we risk damaging, and perhaps depleting, our insurers’ financial strength and – perhaps even more importantly – jeopardizing economic recovery in the years ahead.
COVID-19 is a health emergency with no parallels in living memory. Measures to contain and slow the epidemic are introducing new ways of living and working. At the time of writing, all but 10 US states have some form of stay in place order restricting movement and the conduct of business. As all states scramble to meet this challenge, each is seeking innovative ways to help individuals and businesses maintain personal and economic health.
Business owners – small and large – need help recouping business interruption costs caused by restrictions on activity and trade. They look to many sources for relief, including federal and state governments, as well as their own business insurance policies.
Proposed legislation raises the concern that insurers would bear much more of the costs than they already assumed given the terms of their policies. So far, four state legislatures are considering extending the business insurance coverage for small businesses to allow recovery for business interruption losses due to the pandemic – “even if the relevant insurance policy excludes losses resulting from viruses” (Massachusetts). The proposed Massachusetts and New York legislation follows bills in Ohio and New Jersey.
Ohio’s, New Jersey’s, and New York’s bills apply to employers with under 100 employees, and the Massachusetts bill to those with fewer than 150. Additionally, each bill proposes that the cost for this relief is to be shared among insurers authorized to underwrite business interruption insurance in each state “in proportion to the net written premiums received by each company subject to the assessment on risks in this state during the calendar year immediately preceding the effective date of this section” (New Jersey).
Are the extensions sustainable?
Like state governments, we may all want to see some form of economic relief for pandemic associated business losses. However, with so much uncertainty ahead, the big question is whether the costs of the proposed expanded relief can be safely and sustainably extended to any one industry group, namely insurers.
Each of these bills extends insurance coverage beyond what was included and priced into the policies. None explicitly considers – or appears to be based upon:
- Any quantification of the losses for small businesses in each state
- The effect on the liquidity or surplus of any of the insurers liable for the losses
- The ability of an insurer to collect payments made from their reinsurers
- The effect on any of the state’s guaranty associations should any of the relevant carriers fail as a result of payments made
- Whether these state legislatures will exceed their authority by imposing a post-event modification of policy wording
These considerations are key, given that the American Property Casualty Insurance Association (APCIA) anticipates that the monthly cost of business interruption for small businesses across the US could reach as much as $380 billion. APCIA estimates that the total property and casualty industry surplus is roughly $800 billion. While all the estimates are provisional, it’s clear that the surplus could be exhausted quickly if insurers are expected to shoulder the bulk of small business losses.
Risk of failure
The financial risks described above could be severe, and possibly threaten some insurers with run off and even, perhaps, subsequent insolvency. Historically, four factors heighten the dangers:
- Poor underwriting choices, execution, pricing, or strategy
- Inappropriate claims handling
- Poor selection of reinsurance protection or reinsurance failure
- Unforeseen losses which may be related to unexpected judicial or legislative decisions
(The last factor is usually only clear in hindsight. Consequently, even a hint that we may encounter this risk demands that we assess it and work proactively to limit it.)
Part of the solution
The availability of insurance is an essential part of our economy’s ability to recover and rebound. Without it, protection for businesses against risk, and for workers going about their daily responsibilities, will be compromised.
To that end, some partial relaxation of insurance policy terms and conditions may be possible. However, a blanket bypass of current policy exclusions could have unforeseen, and lasting high-cost consequences. What we certainly can’t afford to do is allow the availability of insurance (to any sector of the economy) unintentionally damage, rather than save, business assets and operations.
Insurers, reinsurers, investors, regulators, and legislators must gain a clearer understanding of the full ramifications of proposed legislation that extends issued coverage. Working together, we can find the right path to a constructive solution and limit potential, destructive consequences.