Experts from across the industry weigh in on the economic damage of Covid-19 and how sharing pandemic risk between governments and insurers could limit the impact next time

Momentum is building in several countries for government intervention in pandemic insurance (Credit: PixaBay)

The global response to the coronavirus pandemic has been fractured, with countries applying different measures to keep their economies running, most of which involve heavy amounts of stimulus spending. One of the reasons they need these injections of cash is the inability of businesses to claim on their interruption policies, due eminently to policy wording. Despite many maligning the insurance industry for this, Peter Littlejohns investigates whether it could be part of the solution to the next pandemic. 


What started as a threat restricted to China has upended the world economy and forced many countries into levels of spending unseen since the 2008 financial crash.

The US is currently suffering the largest number of deaths from Covid-19, overtaking Italy earlier this month — but the UK and France aren’t far behind them.

Lockdowns across the developed world that prevent all but the most essential workers from travelling have toppled industries and stirred governments into huge stimulus packages containing the likes of wage subsidies, direct cash payments, state-supported loans and debt holidays.

But does this need to be the case come the next pandemic?

Many within the insurance industry don’t believe it is — but only if governments are prepared to back policies in the same way they do for other “uninsurable risks”.

“The financial support that is required for businesses and employees in a pandemic such as this runs into hundreds of billions of pounds,” says Dr Matt Connell, director of policy at UK-based professional body the Chartered Insurance Institute.

“Only an organisation with the tax-raising powers of a government can stand behind that level of commitment.”

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Chartered Insurance Institute director of policy Dr Matt Connell (Credit: CII)


Insurance companies are both financially and legally exposed to pandemic risk

While there are calls to insurers around the world to pay out for business interruption claims caused by the Covid-19 pandemic, nowhere is the pressure mounting on the industry more than in the US — where the insurance industry is more complex due to the state legislature system.

While in the majority of cases, communicable diseases, pandemics and viral infections are either pointedly excluded or omitted from policies served in the country, many in and around the industry expect a mass of litigation to follow the denial of claims.

According to Chris Cheatham — former claims attorney and current CEO of insurtech, RiskGenius — if providers do go through the legal system to defend their claims denials, decisions could depend on policy interpretation, which could differ depending on location.

“Lawyers will point to two big issues — number one, does the policy exclude viruses, and number two, does it require physical damage or loss?” he says.

“It’s going to come down to a case-by-case basis in different jurisdictions, and there could be courts and judges that interpret policy language differently.”

Each US state has an insurance commissioner tasked with regulating the behaviour of providers that write risk in their jurisdiction.

Cheatham says some, namely those in New York and California, are taking a balanced approach by requesting that insurers disclose what their policies say about business interruption coverage.

But for insurers operating within a growing list of states, including New York, state legislators have put forward bills that could force insurance companies to include Covid-19 in the business interruption coverage already bought by small and medium-sized companies, effectively rewriting policies without considering the increased exposure of insurers.

While none of these bills have formally become law yet, Cheatham says they could create unsustainable losses for insurance companies if they do.

“If state legislators retroactively apply coverage, the numbers could get very bad, very quickly,”

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RiskGenius CEO Chris Cheatham says the US insurance industry doesn’t have enough capacity to cover claims without government intervention (Credit: RiskGenius)

He points to an estimate given by the American Property Casualty Insurance Association, a major industry representative body, which claims business continuity losses for small firms could be as high as $383bn per month.

“This would have to be paid out if that kind of retroactive legislation was applied across the country, and with the US property and casualty industry holding around $800bn in reserves, that’s not going to last very long,” Cheatham adds.


A partnership between the government and insurers could mean more resilience in the face of pandemics

The sentiment expressed by Cheatham is reflected in the UK as well as the US, with political economist Richard Murphy recently arguing that “no one priced that risk into the policy premium and, as a consequence, if claims were made, the insurance companies would be wiped out overnight”.

After making clear that the terms and conditions of the majority of business interruption policies excluded coverage for the same reasons as their US counterparts, UK insurers and industry associations recently called for government intervention to make the risk insurable, much like it does for terrorism and flood coverage.

In the UK, government schemes Flood Re and Pool Re exist to tackle these two risks, and Chartered Insurance Institute director of policy Dr Matt Connell believes the country could now create a “Pandemic Re”.

“The amount insurers would have to collect to cover a pandemic with an economic impact of this size would require a superhuman sales effort in order to persuade people to part with many times the premium they’d pay for standard coverage,” he says.

“Financially, the government is set up to deal with extreme risks, and the model for doing so already exists with Pool Re in the UK, which is there to compensate insurers paying out for an extreme terrorist attack, like a dirty bomb.”

According to Dr Connell, the reason governments can stand behind such a commitment — and could do so for other uninsurable risks like pandemics — is because of their ability to raise taxes and, for those with a good track record of paying back debt, to borrow a near-unlimited amount from their citizens, other countries and supranational institutions like the International Monetary Fund (IMF).

“With the potential for huge losses covered, the insurance sector has the ability to create a market for lesser risks that couldn’t have been covered without that guarantee, so the arrangement draws on the strengths of the free market and the state’s tax-raising powers,”


Covid-19 pandemic could make business interruption coverage unaffordable if governments don’t intervene

In the US, calls for a “government backstop” — an insurance scheme supported by state reinsurance capacity — to protect the industry against unsustainable losses in the future, are building.

Howard Mills, the former superintendent of insurance for the state of New York and now an independent adviser at Deloitte, says a situation in which insurers are forced to pay out on claims regardless of their policy exclusions would not just be bad for the market, but for consumers too.

“These policies were written and priced with these exclusions in place, and if there were to be a move to negate insurance contracts, we’re likely to see insolvencies of insurance companies and a cessation of the writing of business interruption insurance,” he says.

Mills draws on the series of world-shaking 9/11 terrorist attacks, which made terrorism coverage unaffordable until the government stepped in.

“After 9/11, terrorism insurance wasn’t being written because it couldn’t be priced, so nobody could purchase it,” he says.

“That had a very significant impact on the US economy, the construction industry and real estate industry specifically.

“I think we’ll see the same type of market disruption with business interruption insurance, absent of the federal government getting involved.”

To make terrorism risk insurable again, the George W Bush administration created a “temporary backstop” — the Terrorism Risk Insurance Act (TRIA) — which created a risk-sharing agreement between the state and insurers in a similar way to the UK’s Pool Re.

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Former US president George W. Bush signed TRIA into law in 2002 (Credit: United States Department of Defense)

The function of TRIA was to compensate insurers for losses they paid out for claims resulting from an “act of terrorism”.

But according to Mills, that arrangement was never meant to be permanent, and every year it has come up for renewal, it’s been delayed and even lapsed in 2015 briefly amid debate in Congress — that is, until last year.

“Just last year was the first time that the TRIA programme came up for renewal, and was immediately renewed without any lapse or market disruption.

“The fact the federal government appears to have come around to the view it has a permanent role in being a backstop for terrorism coverage may ease the adoption of a view that it also has a legitimate role to play in pandemic insurance and providing a backstop so private market coverage is available.”


The CARES Act doesn’t replace the need for a backstop

The Trump administration signed into law a $2tn financial package in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act at the end of March to alleviate the financial burden on citizens and small businesses, many of which aren’t able to trade.

Although Mills is supportive of the Act, he warns that if the next package doesn’t include a government backstop for pandemic insurance, businesses could be at risk of a Covid-19 resurgence.

“We’re already hearing from the administration and congress that the initial CARES Act is just the first piece, and there will be additional federal programs coming,” he says.

“But we also know from medical scientists that while there’s a very strong possibility the virus will go into submission in the summer months, it may come roaring back in the fall.

“Not having business interruption insurance capacity would be a severe drag on efforts to restart the economy.”

If Mills is right and the lack of a backstop does pull business interruption capacity out of the market, he says firms will be left vulnerable to more traditional perils, as well as the virus.

“Once they reopen with government approval, with the fear the virus could return with another wave in several months, they’re going to need business interruption insurance,” he says. “Without the federal backstop, it might not be there.

“They’re then without coverage if something else happens, like a fire or a flood.

“It would be a very serious issue for the restart of the economy and I’m hoping Congress will address it.”

Elements of the federal government appear to be heeding the warning of insurers and advisers such as Mills, with California congresswoman and House Financial Services Committee Chair Maxine Waters having submitted a draft bill — the Pandemic Risk Insurance Act of 2020 (PRIA) — to the House of Representatives in March.

But it remains at the discussion stage of the US legislative process.


When should governments start to pay out in the case of a pandemic?

One question that must be answered to add pandemics to the list of uninsurable risks made insurable by governments, is where to place the trigger for an insurer to receive compensation from the state.

“There’s no easy answer to that, because as soon as you require something to be declared, vested interests accumulate on both sides,” says Dr Connell.

While this issue could be solved by the requirement that a third party, such as the World Health Organisation (WHO), must declare the severity of the illness, there could be a severe illness that affects few people and does relatively little economic damage.

“On the other hand, cases like Covid-19, in which the illness is relatively mild for the majority of people, can cause an enormous economic impact,” Dr Connell adds.

“Governments will have to think about a trigger that isn’t just medical, but also economic.”

In the PRIA bill submitted by Congresswoman Waters, the current triggers — which could change as the legislation enters the debate chamber — are that an outbreak or pandemic must be declared a public health emergency by the government, and insured losses must reach a threshold of $250m before the government absorbs further costs.


Does insurance for pandemics require an international response?

Another element of the discussion around future risk-sharing arrangements for pandemics is the need for international backing.

“This is a global crisis and the solution is going to have to be a global one,” says Mills.

“The risk of pandemic is so vast and potentially catastrophic enough to create solvency issues for insurance companies, so governments around the world are going to have to be involved.

“I know that for the International Association of Insurance Supervisors — the global regulatory standard-setting organisation for insurance regulators — this will be a very big issue.”

Dr Connell says the Covid-19 pandemic has highlighted the interconnectedness of countries and their economies, and believes going forward, it will be difficult not to think about pandemic threat outside of an international context.

“We’re part of a global economy and epidemics could have serious implications for things as basic as the food supply, so we’re less and less in a world we can afford to see one nation’s economy take a hit and not feel the effect ourselves.

“What will come out of this will be a lot of serious thinking around the kind of mechanisms that are there to help bail out other countries — these could range from the involvement of the World Bank to forgiving debt.

The extent to which countries shape such a response on the international stage, however, will depend on the political reaction to the pandemic, he believes.

“In the aftermath of this, there will be a debate, just like there was in the aftermath of the global financial crisis, about whether we need to head further down the route of globalisation and improve our international institutions that manage these global risks,” he adds.

“Or do we create a bubble around ourselves and try and siphon ourselves off from them?”