The BI Challenge
Kudos to those who during this time of pandemic understand risk and the insurance industry.
Recovering from the economic devastation caused by the coronavirus will take years and what that recovery will look like is far from certain.
We do know that a strong insurance market will be critical to bringing our economy back and that insurers have been severely challenged by COVID-19, just as all sectors of our economy have been. However, as one of the most highly regulated of industries in a state-dominated legislative/regulatory system, insurers face some unique challenges.
All across the U.S. we have seen efforts in state legislatures to put the cost of economic losses suffered by businesses on insurance companies that write business interruption insurance despite the fact that pandemic is not an insured loss in most policies and no premium was collected for pandemic risk. These legislative efforts to abrogate insurance contracts, if successful, would destroy the property/casualty insurance industry, turning COVID-19 into something it is not: a solvency-threatening event for the American P/C industry.
As a former New York state legislator and superintendent of insurance, I was not surprised to see these ill-conceived attempts to hold insurers liable for risks they had not insured. The “deep pockets” of insurers are a tempting target for those who may not have a deep understanding of how risk-transfer works—or in the case of trial lawyers, simply represent a gold mine of personal gain. Legislators need to understand why the coronavirus is not an insured event due to pandemic exclusions in the standard industry policy forms and the rationale regulators used to approve these forms and exclusions.
Pandemic is an excluded loss in the standard business interruption insurance policy because it is an uninsurable event. Business interruption insurance covers financial losses, such as lost income or operating expenses, when a business cannot function because of physical damage to a commercial property—think fire, hurricane, tornado or damage caused by civil unrest. These losses, which insurers pay out claims for every year to re-build American businesses, are limited to specific areas and time frames and thus make the spreading of risk possible and, as a result, business interruption insurance is readily affordable. This is how insurance works.
The current crisis is different because, as Chubb CEO Evan Greenberg recently said, “Pandemics are different. The coronavirus started in China but it has neither geographic boundaries nor a time limit. The loss potential in practical terms is infinite, but insurance companies have finite balance sheets.”
It is important to note that both the National Association of Insurance Commissioners and the National Council of Insurance Legislators, as well as individual commissioners and departments of insurance, have weighed in and urged the rejection of legislative attempts to abrogate insurance contracts. NCOIL has stated that such efforts would “compound the damage to the broader economy by forcing insurers to pay claims for which they did not contract. To do so could destabilize these insurers and render them unable to pay claims for which they did accept the risk, and did rate.”
What those who would retroactively force insurers to cover pandemics through BI policies need to understand is that this would devastate industry surplus and jeopardize the financial stability of the property/casualty industry and further damage the U.S. economy and delay the recovery. Business owners would not have the ability to purchase affordable BI insurance and would be deprived of coverage when non-pandemic disaster strikes.
Kudos to the NAIC and NCOIL for providing clear and well-reasoned guidance to policymakers. This crisis demands leadership and those in public-policy positions who best understand the insurance industry are providing it.
Best’s Review columnist Howard Mills is a former New York state superintendent of insurance and a former deputy minority leader of the New York State Assembly. He may be reached at firstname.lastname@example.org.