‘BI coverage’ misnomer puts the P&C industry behind the 8-ball: U.S. expert

The insurance industry set itself up for a public relations disaster when it comes to business interruption claims, and it should be prepared to be called out more often on the name given to the coverage, says one risk researcher.

Calling it “business interruption” when the product wouldn’t actually cover some business interruption events was a mistake, said Robert Muir-Wood, chief research officer at risk modelling and insights firm RMS. “In retrospect, it was not smart PR for insurers to provide a product called ‘business interruption,’ but with a clause in the small print explaining why it would not pay out in a pandemic.”

In most instances, business interruption is more likely to occur because of a natural catastrophe, not a pandemic. “The coverage should have been clearly labelled ‘Fire and NatCat BI,” he said during RMS’s conference Exceedance 2020. It was moved to be a virtual event due to the pandemic.

“In the time of the greatest national disaster, it does not look good for insurers to be avoiding their share of the economic pain.”

Partly as a result of the misnomer, now groups such as business owners, lawyers, and political leaders in the United States are calling on insurers to recognize the pandemic as a business interruption loss and allow claims to be processed, Muir-Wood explained.

A number of American states drew up proposals to legislate U.S. property and casualty insurers to pay retroactively for BI claims due to the pandemic. The American Property Casualty Insurance Association responded that such a  move would cost P&C insurers between $220 billion and $383 billion per month. The U.S. insurers’ association noted that U.S. carriers handled three million claims during the 2005 hurricane season and the current pandemic could push through 30 million claims.

Muir-Wood called the reaction to lock horns with insurers a classic case of “coverage expansion post-event loss amplification,” similar to what happened after major catastrophes like 9/11 and the 2017 hurricane season where political leaders challenged insurers to expand their terms of coverage. He added that this won’t shine a bright light on the industry. “In the time of the greatest national disaster, it does not look good for insurers to be avoiding their share of the economic pain.”

In Canada, the P&C industry has been public about the fact that pandemic coverage is generally not offered in basic commercial insurance packages. That said, Insurance Bureau of Canada (IBC), the country’s trade association for insurers, has advised clients to check with their brokers and insurers to confirm whether or not they have coverage, since each commercial policy is tailored to the specific client.

Intact reported last week that only a small number (0.5%) of its clients would be eligible for such protection thanks to a specialized program. For the rest, they’re seemingly out of luck unless they suffer physical damage to the property by an insured peril.

“Beyond this first line of defence, we have exclusions in our policy language that make it very clear that the inability to use or access a property – even in times such as this, in a lock-down – does not qualify for coverage,” Darren Godfrey, senior vice president of commercial lines for Intact, said during a conference call where it was also noted that the insurer has set aside more than $80 million to account for possible commercial claims specifically due to COVID-19.

With the insurance industry taking punches from all comers, Muir-Wood said in his virtual keynote during Exceedance that he expects the “post-event loss amplification” to pick up beyond the lockdown. He cited data that showed a possibly elevated level of hurricane activity for this year (Canadian scientists, meanwhile, are predicting an above-average wildfire season in Western Canada as well). BI policy labels and clarity on what interruptions are included within a policy will help the insurance industry in the long run as any spot where such language would exclude a claim could come under attack, he suggested.

As far as pandemics are concerned, Muir-Wood said that even setting up some insurance mechanisms to provide coverage would be fraught with challenges.

“Pandemic risk pooling proposals are appearing,” he observed. “But this is a risk that cannot be diversified across countries or from the wider economy. If an insurer promises to pay for lost business in a pandemic, in what uncorrelated assets do they reserve?”

 

Feature image by iStock.com/sesame