COVID-19 has forced the complete or partial shutdown of an unimaginable number of business around the world.
Governments are looking for a means to mitigate the impact these closures are having on the businesses and workers affected, driven by the prospect of much larger socioeconomic issues they fear will otherwise result from sudden mass unemployment or failure of businesses. This inevitably involves providing monetary compensation for those affected. Given the gargantuan scale of the crisis, the key question for Governments around the world is how to fund those costs.
The insurance market is an obvious starting point. There is currently much debate as to whether Business Interruption insurance policies in particular should respond to business closures directly or indirectly linked to COVID-19.
Insurers are in many cases adopting a position that the policy language does not include these losses, so they should not pay. Whether or not that analysis is correct, at present it poses Governments with an issue in being unable to offset the costs of compensation. Different Governments are adopting different approaches. At the time of writing, the UK Government is looking to pressure insurers to respond to and pay claims without delay where coverage exists. This does not however address the point made by many insurers that in a large number of cases they say that the policy wordings do not provide coverage for these claims.
A more forceful response is being proposed in the US. New Jersey, New York, Ohio, Massachusetts, Louisiana, Pennsylvania and South Carolina are currently debating the introduction of legislation intended to compel insurers to pay business interruption claims in circumstances where they may not otherwise consider they are liable to do so, based upon the policy language. That legislation would only affect those states, and whilst many similar terms are being adopted, the content and extent of the legislation being proposed varies from state to state. In some cases it is proposed that insurers would be indemnified by the state for meeting such claims but in most cases the loss would rest with the insurers concerned.
Whilst potentially a relief for policyholders, being compelled to pay claims they consider otherwise outside of the cover provided poses obvious issues for insurers. Any legislation with retrospective effect (as would be the case here) is always going to prove controversial, no matter how well intended. There have been many articles written on this already and there will no doubt be many more. Less well considered however, is what such Government intervention may mean for the reinsurance market.
The issue is not just confined to these US states. The question of Government intervention is far from closed. Insureds with operations spread across multiple jurisdictions will no-doubt be following developments closely, with an eye on where to bring claims as trade bodies continue to lobby their relevant ministers/governors/senators, and central banks are being asked to find the funds to cover increasingly ambitious programmes.
There are a number of familiar concerns which tend to arise for reinsurers in the case of catastrophic losses, and COVID-19 will be no different. At their heart are aggregation (both at a primary level and across multiple books of business), follow clauses, and differences in governing law within reinsurance chains reinsurance. Many of these were well documented within the disputes which followed 9/11, particularly in relation to the World Trade Center (WTC) property damage settlement. Whilst the WTC property damage settlement was a single negotiated payment of $1.2bn, with the cumulative effects of COVID-19, business interruption claims alone could quite easily exceed this. Policy limits for small businesses may only typically be in the order of £100,000 to £150,000, but the length of the closures and protracted potential recovery time will, in many cases, exhaust that relatively low limit of indemnity. This coupled with the sheer number of businesses affected even within just a single US state gives rise to the potential for even larger losses to enter the market than we saw from WTC. The WTC property damage loss took over 10 years to be fully resolved and pushed many reinsurers to the brink of collapse. Reinsurers may therefore rightly be concerned about the potential impact of the current crisis.
Whilst too soon to say for certain, it seems likely that issues may arise in a number of areas. By way of example:
- Will reinsurers be liable to indemnify reinsureds that have been compelled by local legislation to pay claims for which they otherwise denied liability?
- Does COVID-19 have the potential to give rise to multiple losses for the same insured?
- How might COVID-19 losses be aggregated across different lines of business and within longer chains of reinsurance?
All of these questions will of course turn on a number of factors including the facts, the governing law and terms of the contracts in question. Understandably, the focus of Governments is presently on managing the immediate crisis and the extent to which insurers should be contributing towards those costs. Whilst we all hope to emerge once again into a more 'normal' world, it seems clear that the full ramifications of decisions taken now by both Governments and insurers are likely to impact both the insurance and reinsurance market for many years to come.