BI losses could be ‘catastrophic’ for insurers
Insurers would face an “existential threat” if they were forced to pay for two months of pandemic-related business interruption insurance losses by changes in the law already proposed in seven US states.
That is the view of analysts at AM Best, who worked out that such a scenario could wipe out up to half the capital backing US insurers and reinsurers writing BI insurance.
Standard BI policies exclude pandemic as a cause for claims, but some states have proposed legislation that would make retroactive changes to force them to foot the bill for lost business activity resulting from restrictive measures to combat the spread of Covid-19.
AM Best said “the impact of legislation would lead to estimated monthly BI losses of $150 billion to $200 billion for businesses with fewer than 100 employees.
“As a result, a closure of two months would result in a projected after-tax capital and surplus loss of 37 to 50 per cent.”
The New Jersey-based rating agency estimates that about $633 billion of US re/insurance companies' surplus is exposed to BI losses.
Since the Sars epidemic of 2002-03, most insurers had incorporated Insurance Services Offices language in its policies expressly excluding losses related to infectious diseases, AM Best said.
“To date, seven states have filed Bills that would require insurers to pay for BI coverage — regardless of whether pandemics were a covered peril under the policy terms,” AM Best said.
“Most of these states are contemplating payouts to businesses that have fewer than 150 employees. New York is considering a limit of 250 employees.
“AM Best believes the impact of any such legislation on the property and casualty insurance industry would be catastrophic, almost certainly compromising the financial ability of insurers to meet their existing financial obligations related to insurance coverage provided to individuals, families, motorists, state and local governments, and businesses.”