Misconceptions regarding pandemic business interruption cover- contributing to preconceptions for future programs?

These may not be ideal times for the U.S. commercial insurance industry.  Sure, that is stating the obvious as COVID-19 business interruption claims encounter denials of cover, and now civil unrest damage claims overlay the undercurrent of BI disappointment. It is hard to imagine that the trillion-dollar Covid-19 issue can be significantly affected by a billion-dollar […]

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Dominoes have fallen – what insurance learnings have we so far from COVID-19 business disruption?

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When this article was first posted in late February 2020 the COVID-19 outbreak was still focused on China, but its effects were menacing the globe.  At that time the concern was supply chain issues and a less than one hundred coronavirus cases distributed primarily on the east and west coasts.  As this article is reread one can consider what parts were on point, and if on point, was there anything that really could have been done to mitigate the then unimagined scope of what was to come?  Let’s revisit three months ago, think of what might be done next time, and also discuss with insurance agents how the market’s customers have changed in the ensuing time period (if at all.)  Text from the original article will be noted in italics.

 

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

February 27- It’s clear there is much of which to be concerned regarding novel Coronavirus 2019 (aka COVID 19), including  the direct impact of illness and death among those who have contracted the disease, and the indirect effect of closure of travel, quarantine, closures of schools, businesses, and frontiers. 

Who is considering the effect of the virus on local, regional, and global business?  Whether you believe in the extent of virility of the virus or not, one thing is certain- businesses across the globe are showing symptoms from COVID 19.  Is this an insurance disaster or unexpected new market?

Disaster or opportunity?  Sun Tzu notes in “Art of War”, “In the midst of chaos there is also opportunity.”  Certainly Sun Tzu’s intent was far from discussion of business and insurance, but the principle still applies- when there’s turmoil purposeful persons leverage opportunities.  My agent colleague, Brett Fulmer of Maxwell Agency Insurance Services in southern California recounted in a recent discussion, “I have been able to develop a broader presence within my connections and local industry through hosting and participating in virtual sessions.”  In essence, Brett capitalized on the new ‘Zoom environment’ to become an influencer, an action that has resulted in some unexpected business referrals.  Would this have happened outside a forced virtual new world? Perhaps, but in contrast to many who may have retracted into a safety zone that agent saw beyond just the next sale.

Bradley Flowers of Portal Insurance in the state of Alabama (and co-host of the Insurance Guys Podcast) advises his agency’s business has held its own so far during the work from home period, and he has been able to find opportunity in that virtual chaos by ‘patching up holes in the business’ since he has some unexpected management freedom by not being collocated with staff.  He didn’t say so, but one might say his staff have grown in their ability to make decisions, their initiative to serve, and through forced learning due to separation from colleagues’ input.  Perhaps the virtual model will be found to be an unexpected boon for the agency.  Ryan and Andy Mathisen founders of Glovebox, a virtual tool for agents’ and customers’ use in organizing insurance information, reiterated Bradley’s point about virtual work- many are wondering about the utility of offices and requirements thereof, not full disappearance of analog offices, but growth of remote work options based on COVID-19 environment experiences.

The business world lives with the two-edged sword of global interaction; on one edge a manufacturer in Barcelona can economically design and digitally source machine parts from a ten person shop located in Hubei Province in China, on the other edge is the disruption that may occur to the Spanish manufacturer if the machine shop is inactive or unable to produce a custom part. What of the cascading effects of supply chain disruption?

This has been proven true in more ways than can be considered.  Access to personal protective equipment is the poster child instance of this actuality- the bulk of the supply chain for PPE is housed in China, and a combination of business shutdowns there, ill-preparedness and slowness to act in most markets caused those products to be of dangerously low supply when most needed.

Unless your business was affected by the SARS outbreak in 2004, affected by the more localized (but terrifying) Ebola virus, or mosquito borne diseases like Dengue or Zika, the business effects of outbreaks are typically small- unless you are immersed in the outbreak.

For this article a deep dive into what’s covered by insurance and what’s not will not be taken- that would be too lengthy an effort for a Daily Fintech reader who needs an overview.  I can say that Business Insurance and Marsh and McLennan have a good summary document here, “Liability policies may respond to coronavirus” .  Travel insurers typically do not afford coverage if a traveler simply decides not to travel due to perceived risk (some policies have the ‘cancel for any reason’ option but it’s an exception placement.)  Suffice it to say that effects of outbreaks do no not fit well into insurance cover.

So what’s the point for this article?  Or, in this case, an updated version?

Awareness and consideration of how outbreak ‘dominoes’ can affect your business, and are there insurance options that might provide financial protection?

Let’s consider the potentials for risk management working backwards from end businesses: 

      • Most business interruption covers are based on an occurrence of direct physical loss, either on premises or within a supply chain. Unfortunately, disease outbreaks are seldom considered direct losses, and in most cases are excluded causes of loss.

Hasn’t this been proven to be the COVID-19 economic disaster for every economy?  Business interruption cover was never designed for pandemics, even to the point of minimal reinsurance capacity being present for that risk.  As such a multiple month shutdown in the U.S. has caused unreimbursed trillion dollar ripples across the twenty five million or so small and medium sized businesses, local and state governments, has overwhelmed banks as they work to administer federal response programs, and even has a ripple effect with health care organizations.

Continuing, we still are uncertain of effects that will be produced from:

    • Worker’s compensation
    • Liability from infection from customers being on premises
    • Directors and Officers cover if business results flag due to alleged poor planning
    • Supply chain risk- all along the supply and transportation chain? Has just in time become a liability
    • Loss of suppliers due to failures of businesses in the worst outbreak areas
    • Actions of governments? Legal ramifications of non-compliance
    • Employee actions due to extended periods of no work
    • Loss of key staff due to inability to maintain salaries
    • Interest rate risk from speculation
    • Inability to travel to affected areas where management oversight is critical
    • Increase of cyber risk due to reduced attention to risk and opportunistic bad players
    • Reduced productivity due to requirements for and inefficiencies of virtual work

There were other items listed in February’s version but if you are purposeful and look back to this article you’ll see we are all too well knowing of those issues’ outcomes.

John Neal of Lloyd’s recently published an estimate of COVID-19’s estimated effects on the global insurance industry across all lines- $200 billion.  Even if the $100 billion or so of investment portfolio losses are set aside from that number the remaining projected underwriting loss of $100 billion remains an unprecedented amount for the industry.  The terrible national catastrophe years of 2017 and 2018 did not reach that level.  The unique nature of the insured losses due to COVID-19 effects will not be fully realized for years as many of the affected covers produce long-tailed claims.  Recognition of the extent of the potential claim costs will prompt significant reserve levels being  marked by carriers, which will be an anchor on profits and constriction on ready capital.

It was just a few months ago that global broking houses were eyeing the hardening commercial markets favorably in terms of rising rates and growth of available products.  Contrast that outlook now with carriers rebating premiums and global brokers pulling P&L guidance.  If a main global firm like Aon acts to reduce staff and executive suite salaries (see PC360 article here ) due to the outbreak, there is clear indication that the pandemic’s effect goes well beyond SMEs’ business interruption cover concerns.

Going forward there are learnings for the risk management industry, and for any business that might be affected by issues related to outbreaks.  The availability of parametric insurance may become more commonplace, and the practicality of its inclusion in insurance plans will increase. 

There is no practical answer for pandemic insurance cover within the indemnity model.  Even a parallel fund such as was established by the U.S. Congress for terrorism effects (TRIA) would potentially fail under the weight of the volume of claim handling, and under the enormous gravity of trillion-dollar severity.  Claim administration of just ten percent of potential SME customers’ claims would potentially consume fifty million man hours of adjuster labor. And, since TRIA backstopping is legislated to cap at $100 billion, extending TRIA claim demands at the level of what is an average Paycheck Protection Program principal of $200,000, times 2.5 million claims and the ask of the fund becomes $500 billion, an amount that would need legislative approval.  Industry capital would be fully consumed addressing the claims, and government reimbursement would be- uncertain at that level.

Carry the parametric principle to supply chain interactions, or any business interaction where a disruptive trigger, or index can be identified, and a risk amount can be applied.  Business disruption due to a specific government command, for example, or supplier closure due to a WHO declared outbreak.  There may be many reasons why indemnity covers are unable to be written, but parametric options must be considered. 

The key is that global outbreaks do occur, and while perhaps not as potentially costly as COVID 19, significant none the less. 

Global reach, fragility of supply chain interactions, and business continuity demand different approaches, and provide the insurance industry new opportunities for risk products.

We are three months and a lot of economic heartache separate from our initial discussion of coronavirus’ potential effects.  Three months from now it would be good to be focusing on the opportunities the industry has found in the COVID-19 chaos.

I appreciate the additional input received in preparation of the article from insurance consultant and innovator extraordinaire, Chris Carney .

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Insurance- the great water balloon- squeeze here, bulges there

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Insurance is not a new business, but its functionality and appearance to the public may be in the post COVID-19 world. Plenty of thought is being given to the future of many types of insurance cover, its underwriting, distribution, and claims, etc.  But what about the ‘right now’ for insurance lines during COVID-19 operations?  Insurance is a global $5 trillion business, and while there are sectors that will be depressed, business marches on and so does insurance cover. So what factors may be affecting lines of cover, and what is the outlook going forward in 2020?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Without question 2020 will be a down year for global GDP, with one estimate supporting an overall decline of 2.4% (Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP .)  Will insurance premiums decline by that amount, more less, increase?  It’s certain that the global economies will continue to require risk management. Having mandated shut downs does not allow for shut down of insurance cover for a business; liability remains something for which protection must be maintained. Motor cover has been shown to be less important by the mile, but still mandated in most jurisdictions.  The thought process carries on, and the process seems a good exercise for us this week, perhaps will generate some thoughts and discussion.  I’ll lead off, give my 2p and you can chime in.

Business Interruption

We’ll get the obvious cover out of the way.

COVID-19 has exposed business interruption cover as the factor no one knew that everyone needed.  There will be two main efforts for BI- litigation for those who insist their policy included it, and looking for purchase for those who know they will need it for the next pandemic. Government pressure for mandated cover (if successful) for BI would make all arguments moot- the BI response would cripple the industry for all covers.  As for availability of BI cover that addresses pandemics? A sea change for BI cover would be needed to exempt the cover from needing a covered physical loss, and removal of exclusions (or establishment of endorsements) related to pandemics. Oh, and the pesky needs for capacity, underwriting understanding, planning for claims, etc. Nothing available soon, at least in an indemnity product.

Two interesting related facts- Marsh and Munich Re had offered pandemic cover- Pathogen Rx as recently as Fall, 2019, but had little demand for the cover. And Amsterdam’s DGTL Festival ‘accidentally ‘ had event cancellation cover for pandemics due to an admin error by the organizer’s staffer who checked off a box for pandemic in error .  A $2.3 million error to the good.

Workers’ Compensation or Employers’ Liability

The cover that is a looming monster due to potential latent effects of COVID-19 being contracted after businesses begin to reopen. The WC cover in the U.S. while slightly differing state to state in large part will afford cover for employees who claim contracting the virus on the job. There’s not a heavy burden of proof so medical costs and loss of wages will accrue to the WC policies- all new peril costs for the systems.  India has similar potential for excess costs, the UK’s Employer Liability cover that mirrors WC a little will be limited for severity but will have frequency effects. For all jurisdictions there will be an expense increase as WC claims are cumbersome and heavily involved in unstructured data.

Business Owners/General Liability

If fewer feet are through the door there is less exposure to claims, so this cover will be a function of the length of shutdowns. What will affect the liability portion will be allegations of customers claiming COVID exposure and those businesses that are not careful and organized in their operations regarding safe methods and clear notices to customers may be higher frequency targets for lawsuits. And in similar fashion to WC and BI claims, handling the claims will consume adjuster production time. Carriers will be less able to simply deny/repudiate claims as regulatory oversight will be heightened. The UK’s FCA has opined that while it’s not the regulators place to determine cover, the carriers had better be thorough and prompt in determining cover and making payment where warranted.  The post-COVID environment would be an unfortunate place for a carrier to engage in coverage shenanigans.

Motor/auto

This cover has been the poster-child response cover for carriers in recognition of less service frequency needed, fewer claims, and the need to rebate premiums due to the reduction in exposure. Many carriers have taken those steps in handing premiums back or establishing forward looking credits (summarized well here by Nigel Walsh. )

An aspect of significant reductions in claim costs will be reduced loss ratios (surely a 1/1 rebate will not occur), but absent significant reductions in cost structure one might expect increased expense ratios due to earned premiums be reduced by rebate amounts.  It’s a big water balloon, isn’t it?

Property/Homeowners

Might just be a push- higher occupancy periods to detect issues sooner, but also higher occupancy rates to task mechanical systems and prompt sudden failures with ensuing damage.  No rebates offered quite yet, but one is never surprised.

Credit Risk

The ability to pay invoices will be hamstrung across many business sectors and severity concerns are already transmitting through to reinsurance products focused on same, and hedge vehicles have had the elevated risk priced into their trading prices already. Another form of credit risk- supply chain activity- will experience fits and starts as suppliers have reservations about purchasers’ ability to pay, and associated insurance costs will increase.  More water balloon action.

Mortgage default risk

Seems intuitive- higher unemployment, gradual recovery, delayed benefits flowing from the government, and those who live month-to-month will have less ability to pay mortgages, both individuals and businesses. Artemis.bm indicates approximately $9 billion in ILS/bonds related to mortgage default risk; combine that volume with the significant drop in the EurekaHedge ILS index during the month of March and while the data are not directly correlated they are related and suggests one’s pause for thought.

Health insurance will be left out of the discussion- that is the wild west in terms of severities prompted by COVID-19 treatments. The corollary however is that elective surgery has been curtailed as has regular health oversight, both high costs for insurers.  Combine the assistance governments have been providing and health insurer positions may not be as bad as one would expect. May not.

Reinsurance has little exposure to COVID-19 and so far pricing has been favorable for renewals and new placements based on market factors for those lines, see an example reported by SCOR here .

BIG water balloon, insurance.

The industry also must keep a weather eye on the next occurrence of systemic risk, including a pandemic, and the response would not serve well if it’s a fully government funded program. Too slow, inefficient, needlessly expensive and would overlook strengths the insurance industry and capital markets would bring. All the players affected by and influencing risk management need to work to collaboration- would make all the lines of cover more stable. #TenCsProject

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Carriers can be wrong in being right. Governments too. Time to get benefits to SMEs.

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Fiduciary duty or duty of care?  What a quandary for insurers this business interruption insurance situation continues to be.  Easily a trillions of dollars concern in western economies alone, more each day as the mandated shutdowns continue.  The author has previously noted the tension between repudiation/denial of BI claims and the drumbeat of public and government pressure to afford cover; is there also a public duty of care insurers hold to ensure there’s an SME business community to insure once the permission is given to restart the economy?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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  • No one anticipated COVID-19 in the manner in which it came.
  • Few SMEs had excess cash set aside for this dark of a day or bad business weather.
  • Few insurance policies were sold that covered BI losses that were not precipitated by direct physical damage.
  • Even fewer insurance policies afforded BI cover that was prompted by government or other indirect reactions to a pandemic.
  • Very few insurance proceeds have reached the street.

All the efforts have been focused on defensive postures by carriers, concerned outreach by SMEs to government, plaintiffs’ bar attorneys aggregating clients who have suffered economic losses due to shutdowns and loss of clientele from social distancing, and constitutional challenges proposed by US elected representatives.  Oh, and for U.S. SMEs, plenty of effort collecting business records for applications for stimulus loans.  Lots of actions, few results.

 

At this time there must be a recognition that posturing does not resolve anything, nor does it get recovery funds to the street.  Government and litigation trying to force insurance companies to foot a trillion dollar plus bill for BI losses is truly a fools’ game.  The full capitalization/available cash from insurers would be insufficient to resolve BI claims, if the claims could be accurately calculated, and if the claim period was known (which at this time it is not.)  What would be accomplished is the functional failure of the risk financing industry as it’s known.

That being said, can the insurance industry simply build a defensive wall of policy terms and deny claims and any duty to mitigate the costs of risk for the SMEs?

Sure they could, and a large portion of the Before COVID (BC) cohort will fail, and the existence of a significant driver of business would sunset, along with the need for those firms’ insurance policies.

 

One wonders if SMEs can wait for government sponsored programs to get up to speed, or if sufficient funding will be available to address the needs of even a portion of the many millions of businesses in need.  In what way can insurance companies step in- without compromising uniform application of policy terms- and shine a little light on these dark days?

There are many P& C carriers providing givebacks, rebates, credits, and other premium forbearance (see the curated list by Nigel Walsh here), the vast majority being personal motor/auto benefits.  By the author’s calculation of available and applicable US auto premiums the $8-10 billion total being rebated or credited to individual insureds falls about $6 billion short per month of what excess premiums calculate to.  It’s a start, for sure, but a closer look is needed.

 

In contrast, what is in the press are reports of not only denials of business insurance policies’ coverage for business interruption, but uncertain positions carriers may be taking in supporting those denials- see mention of one carrier in this Business Insurance article, “Most small UK businesses not insured for pandemic: Watchdog”, and the FCAs position that carriers will need to be self-regulating for confirmation of pandemic policy cover.

Having ten US states to date with legislative proposals to change insurance contracts ex post facto to include BI cover for pandemics is an expression of frustration of the part of those states in there not being a better resolution for the economic shortfall.  Passage of any of the bills will prompt litigation focused on Article 1, Sections Nine and Ten, of the U.S. Constitution that expressly forbids alteration of contracts after the fact.  Other countries have different treatments and brief research for this article finds the UK Parliament might have the right to pass such a law stipulating insurance companies being responsible ex post facto existing insurance contracts, due to the doctrine of parliamentary supremacy allowing Parliament to pass any law it wishes (https://en.wikipedia.org/wiki/Ex_post_facto_law ).  No matter the legal handling the outcome of any actions would potentially take years (months at minimum) for benefits to flow to insureds.

Slow admin of government programs, little or no coverage for SMEs within insurance policies.  SMEs shuttered, tens of millions unemployed.  Who will provide confidence that SMEs’ rents can be paid, benefits can be maintained, TAXES PAID, and confidence that the end of the shutdowns is not ad sundown for SMEs?

Carriers can take action without compromising any legal positions re: insurance contracts.  Governments can take actions.

Consider possibilities:

  • Reduce policy premiums to a minimum– $10, or 10 euro. Get regulators on board.  No need to change policy terms, risks are lower since businesses are shuttered.  Backload renewal premiums into 2021.
  • Rebate some premiums for April– same support as above.
  • Governments- provide some tax credits to the carriers for the premium forgiveness.
  • Carriers, brokers, agents– make a specific and comprehensive effort to review the provisions and endorsements of every policy to confirm there absolutely is no room for BI cover. Policies are worded differently- direct physical loss, direct physical damage, direct property damage, damage due to a covered risk, etc.  Spend time on finding cover in concert with efforts spent denying/defending against cover.
  • Collaborate with peer companies in establishing recovery funds that are dedicated to SME benefits. Not policy benefits, but support benefits.
  • Reach out to every customer to suggest recovery resources that may be of benefit to them. Actually know what those resources are.
  • Suspend payment of firms’ sales tax and withholding taxes until the shutdown ends and cash flow begins.
  • Find clever ways to accelerate acceptance, review, and funding of loans. Want to pass meaningful law changes?  Look at the CFR that stipulates SOP for the SBA (how about those acronyms?)  The persons who can make this happen know what the acronyms mean.

Every effort is needed to cut the Gordian knot of admin barriers that delay getting benefits to the SMEs.

There will be a lot of financial resources spent developing and defending positions in court; why not calculate the cost of helping vs the cost of defending?

The insurance industry, regulators, governments, insureds, capital markets and banks have a vested interest in continuity of SMEs’ viability, finding practical solutions for the current crisis, and planning for the next pandemic or economic outcome of systemic risk effects.  Planning must begin now, and efforts are underway, e.g., the Ten C’s Project.  Government programs initiated on an adhoc basis are not adequate response vehicles, and laying the burden upon the shoulders of insurance is not a prudent path to follow.  We need to collectively mitigate the current effects and collectively solve how future economic occurrences will not be like what COVID-19 has wrought.

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Business interruption- cover that’s too big to cover- but needs to be next time

Business interruption insurance

On February 27  Daily Fintech published this article, “Dominoes fall- business disruption and risk management in the COVID 19 environment,” wherein there was a discussion of the indirect effects of the then China-based COVID-19 outbreak, and the estimation of economic damage due to the outbreak being $1 trillion.  We now know the effects of the pandemic will be in the many trillions of dollars, and business enterprises around the globe are realizing that business interruption (BI) financial losses due to the outbreak are generally not covered by their commercial insurance policies.  This is not a surprising finding since BI cover has the policy need of direct physical loss, which a viral pandemic does not produce.  Many implications here regarding coverage gaps and systemic risk, and global application of moral hazard.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

In one month’s time the anticipated BI losses due to COVID-19 increased manifold, became global, and have become difficult to quantify accurately, an apt expression of the unexpected outcome a systemic risk like a pandemic can cause- an uninsurable risk due to those exact criteria.

Business interruption cover is described by Marsh & McClennan as follows:

  1. We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” 
  2. The suspension must be caused by the direct physical loss, damage, or destruction to property.
  3. The loss or damage must be caused by or result from a covered cause of loss.”

The problems with the BI cover regarding COVID-19 effects are…all three points.  Items 2 and 3 are not applicable due to the outbreak being the cause, and a viral and item 1 sets such wide expectations for the insureds as to be impossible to summarize.  Loss of business income? Is that cash flow, ongoing bills, net income reduction (based on what?)

Even in the most direct loss cases, say a fire experienced by a business owner, BI losses are seen differently by the business as compared with the carrier.  Again, what constitutes loss of income, and how is the loss indemnification supported and adjusted?  BI cases are difficult to wrangle and often are simply negotiated.

If that handling were to occur say, in the U.S. for all the COVID-19’s affected insured businesses, the twenty-five million or so claims would need to be adjusted throughout the decade, would result in indemnity amounting to  two to three trillion dollar total severity, would make all commercial carriers insolvent, and result in a consequential insurance catastrophe of loss of the industry.

There is no retrofit that would have the expected effect the insureds would need.  Take for example the intention the New Jersey Assembly has in Assembly Bill 3844.  The NJ Assembly proposes the insurance industry provide BI coverage to NJ businesses with full knowledge that BI cover does not apply and is excluded from cover.  NJ would like carriers to pay the cover through legislated changes to the insurance policies’ contractual intentions, with NJ then reimbursing the carriers in the future for all or part of the payments.  Just that one state’s businesses may have BI claims that exceed $100 billion!  That is not a reasonable nor a legal option (would surely be challenged if enacted) and would challenge the solvency of the state’s carriers.    Ex post legislation is not an answer.

Firms have already initiated legislation in the U.S. for breach of contract, and while most in the industry agree that BI cover is a long shot, the irony is that the claims being made trigger the need for loss and expense reserves, and the initiation of litigation will- absent cases being considered unworthy by courts- require that the respective carriers recognize worst case scenario reserves being placed on their balance sheets- a profitability hit that could be significant due to the volume of potential claims (think asbestos.)

Truly there is not a practical answer to the enormity of the question, so the industry and businesses must be forward looking in anticipation of another like occurrence, whether it’s a viral outbreak, cyber outbreak, or regional natural disaster.  Systemic risk effects will occur again, and mitigative actions need to be considered now.

 

I considered one of many scenarios of systemic risk in the recent article published in InsurTech360, “Rethinking excluded pandemic (and other) risks.  The article discusses just one of many loss occurrences- events and conferences, and considers the many aspects of planning, response, potential cover, admin of the response and potential payments for what is for an indemnity product an excluded peril.  Future cover cannot be full reimbursement as we have discussed- the indemnity factors are troublesome to adjust.  Parametric approaches to shared risk are discussed in the article as is planning and segmentation of the loss layers.

Insurance veteran Mark Geoghegan recently recorded a ‘solo podcast’ on the Voice of Insurance that addressed the topic in depth, and touched on the many issues of BI claims and COVID-19.  The ‘selfie’ podcast, unfair-punishment-and-pandemic-re editorialized on the two-edged sword that BI handling by carriers will produce- 1) carriers cannot reimburse insureds for BI claims in that there is no policy cover, and there are not sufficient resources within the industry to do so, and 2) the carriers will still be left as the parties with record levels of capital that will not be applied to the situation, not a good view for the insured public to consider.  Mr. Geoghegan walked through some efforts that could be put into place going forward, and some collective global actions that would distribute future systemic risk that would have similar effects as COVID-19.  He clearly agrees with the writer that BI indemnity cover remains unreachable, but parametric hybrid products might be a compromise, if there is sufficient global participation by carriers, insureds, and governments.  The industry knows that government subsidized products such as the U.S. NFIP flood program are not the answer.  In fact there are some influential insurance persons who suggest private parametric plans supported by alternate risk sources are the most effective and stable answer, and not government backing as is found in the U.S. Terrorism Risk Insurance Act (see Dr. Marcus Schmalbach’s article, implement-pandemic-perils-into-tria-no-a-free-market-solution-is-needed ).  Dr. Marcus is a knowledgeable proponent of capital markets being a primary force in financing these unique risks.

Mr. Geoghegan suggests that cooperative programs such as might be gained through premium contributions to a global pool of insurance backing for systemic risk response built over years is an option to consider.  The pool would also help fund an important initiative going forward- research into causes of pandemic outbreaks, anticipating new viruses, be prepared to respond with strategic supplies, and with several years of global contributions, a substantial response fund that is not indemnity-based and available to all.  However, what does that mean?  Participation by all countries, carriers, and governments, a daunting task for the best of motivations.  And as Mark reminded the listener- memories are short, and large sums of money are attractive targets for raids by cash-short governments.  The concepts are provocative and if actionable in small part a sure improvement.

The author had a related thought-provoking discussion this week with  Thomas Verduzco-Weisel, Director Central Europe at Symbility – Mobile Claims,  a colleague in Germany who has seen the effects of disappointed customers; the chat focused on any actions that might be taken to respond to customer concerns- now.

We settled nothing categorically but did consider some options carriers can take to mitigate the effects of the constant drum beat in the press coming from businesses that have experienced or anticipate substantial BI losses:

  • Reduce or suspend premiums based on companies’ reduced operations.
  • Coordinate with other carriers in establishing a response fund that can provide direct cash benefits to business customers.
  • Extend coverage for risks that are solely associated with COVID-19 actions, e.g., forward-looking coverage for credit risk, health risk.
  • Partner with government regarding establishing captives- immediately- for mutual sharing of risk within affinity groups
  • Establish help centers for staff to assist in navigating insurance and finance issues
  • Look for coverage within policies that were in force at the inception of the pandemic, e.g., cover for civil authority actions in temp closures.  Don’t wait for a claim to be initiated, create the claim and contact the insureds proactively
  • Know how your product lines will evolve going forward- parametric options, review and retest exclusions, etc. The efforts must be uniform for all like insureds, and reproducible for similar perils.  Not taking any action is going backwards.

Plenty of discussion of a problem that has grown into a multi trillion dollar beast, and a challenge for the industry and its customers, and not to forget, governments. Systemic risk from pandemics can no longer simply be a line in the exclusion section of insurance policies, but by the same token cannot be relegated to macro government response.  For COVID-19 all players have been guilty of the oldest of risk management dodges- moral hazard.  Why bother insuring the outcome if someone else will cover the effects?  Well, that time is now gone.

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