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Feeling the heat: BI cover comes in for scrutiny

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Anything can happen once politics becomes entwined with insurance matters, and globally it’s the turn of business interruption (BI) cover to feel the heat.

In the US, federal and state legislators have raised questions over BI cover and in some cases have called for insurers to retroactively recognise income losses due to COVID-19 as part of their policy coverage.

US President Donald Trump has waded into the issue, suggesting there are restauranteurs who have been paying for business interruption cover for 25-35 years who are struggling to be covered when pandemic may not be mentioned as an exclusion.

“Now, in some cases, it is, it’s an exclusion,” he told a recent media briefing. “But in a lot of cases, I don’t see it. I don’t see a reference, and they don’t want to pay up. I would like to see the insurance companies pay if they need to pay, if it’s fair.

“But you have people that have never asked for business interruption insurance, and they’ve been paying a lot of money for a lot of years for the privilege of having it. And then when they finally need it, the insurance company says, ‘We’re not going to give it.’. We can’t let that happen.”

Reinsurers, insurers and brokers have said they are ready to work with others on solutions, but the answer to virus-triggered economic crisis doesn’t lie in making existing BI policies respond widely or retrospectively.

“Insurance coverage works by spreading risk, but that model simply cannot account for a situation in which losses are catastrophic and nearly universal,” insurance industry representatives say in a letter to congressmen.

“Standard business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19, and as such were not actuarially priced to do so.”

The New York-based Insurance Information Institute says it is critical to maintain the integrity of the industry’s business model, which has been designed “hand-in-hand” with the regulatory community.

“If insurers nationwide had to pay business interruption policy claims for which insurers collected no premium, it could cost the industry each month anywhere from roughly $US150 billion ($235 billion) to nearly as high as $US380 billion ($596 billion) ,” institute Vice President and Senior Economist Michel Léonard says.

Insurers in London have also come in for criticism, with Hiscox under fire after confirming in a market update that its core policy wordings don’t provide cover for BI as a result of pandemic measures taken by the UK Government.

The UK Financial Conduct Authority last week wrote to insurers regarding business interruption cover for SMEs, indicating that it is closely watching.

Interim CEO Christopher Woolard has reiterated that firms generally “should consider very carefully” the needs of customers and show flexibility, and business interruption claims should be assessed and settled quickly where there is an obligation to pay out.

“Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the COVID-19 pandemic,” he says.

“While this may be disappointing for the policyholder, we see no reasonable grounds to intervene in such circumstances.”

Insurers and reinsurers have stepped up measures to limit their BI exposure to pandemics following the experience of the SARS outbreak in 2003 and the Middle East respiratory syndrome (MERS) epidemic that followed.

Chubb Global CEO Evan Greenberg told a CNBC interview last week that that any moves by US legislators to retroactively force insurers to cover pandemics under BI policies would be not only unfeasible but unconstitutional.

“I understand they are looking for a remedy, but this would be a self-inflicted injury and create great uncertainty at a time when we have enough uncertainty and we’re trying to heal the economy,” he said.

Issues have also arisen in China, with Fitch Ratings last week warning that the Chinese Government’s recent directive to set up policies to cover enterprises against BI losses due to the virus could pose risks to the underwriting stability of property and casualty insurers.

The Insurance Council of Australia declared a catastrophe for the COVID-19 virus on March 11 and has provided guidance on areas of cover that may be affected.

For BI, it says the majority of policies are likely to contain exclusions relating to losses caused by notifiable diseases, although some businesses may have specialist cover.

As with any catastrophe or claims event, it is not good news for the insurance industry when people think they are covered for something, or feel they should be, but find out otherwise.

Regulators in those circumstances take a close interest, and politicians besieged by disgruntled constituents and mindful of their own electoral circumstances are happy to deflect attention elsewhere.

That can end anywhere, if the insurance industry is not ready.