Misconceptions regarding pandemic business interruption cover- contributing to preconceptions for future programs?

These may not be ideal times for the U.S. commercial insurance industry. 

Sure, that is stating the obvious as COVID-19 business interruption claims encounter denials of cover, and now civil unrest damage claims overlay the undercurrent of BI disappointment. It is hard to imagine that the trillion-dollar Covid-19 issue can be significantly affected by a billion-dollar unrest issue, but that is what the insurance industry had led itself to.

Borrowing part of a quotation from, “Complications Grow for Business Income Insurance,” recently republished in Carrier Management, “BI is such an ill-defined and hard to understand concept,” stated Mike Vitulli, director of Risk Management Services at brokerage Risk Strategies. “Most businesses did not consider what it meant to have coverage, simply assuming that if their business shut for any reason, they would be reimbursed.”

Continuing the message from the article and considering there are approximately twenty five million small and mid-sized businesses in the United States (40% of which have BI cover) makes ten million businesses that are uncertain if BI cover addresses cash flow differences, net profit, gross profit, continuing expenses, or payroll. There is significant variability within and across the many BI policy/endorsement forms as to provide plenty of muddy water to deal with.  So, even with civil unrest and direct physical damage being present (triggering potential BI cover), businesses remain uncertain what their policy benefits now are overlapping civil unrest onto COVID-19, one with cover and one without.

The kicker? Carriers have the same uncertainty.

And what of the balance of the businesses that for some reason either chose to not have BI cover or did not have it offered? 

A positive is that civil unrest BI cover decisions and administration thereof will be addressed by carriers. Yes, it will be in fits and starts but in due time carriers, adjusters, and agents will lead customers to policy-based BI recoveries for those claims.  Yes, there will be a lot of work the insureds will need to do to support the civil unrest BI indemnity, but in time claims will be settled.  Unfortunately, the COVID-19 BI claims will linger and will need to wind their way through litigation. 

Will there be learnings?

Simultaneous to current business interruption claim administration, the industry is experiencing activity with an eye on what to do for the next pandemic, or systemic risk that typical insurance products are not intended or designed to insure. The economy-wide business interruption prompted by the effects of COVID-19- closure of physical businesses, significant placement of persons out of work, unavailability of resources, staged shutdowns and reopens of business, prohibition of many business activities, etc., placed the U.S. economy into immediate chaos. Absent private insurance coverage or private response resources the federal government through the auspices of the Treasury Department had to step in.

More than $1 trillion in business support and three months later, economic relief has come, albeit in what has been deemed an unequal basis for the SMEs. Issues with applications, response delays, and program administration remain in great part unresolved. As the default backstopping resource the U.S. government was as unprepared for an economic disaster of this nature as much as were businesses and insurers.

Without delving into the specifics of the current proposals to have the economy and its businesses prepared for the next pandemic, the aspects of such proposed responses can be noted:

•  Mirroring the response as a ‘pandemic’ risk insurance act, an indemnity model PRIA (similar to the terrorism based TRIA) that allows government backstopping once a threshold amount has been paid for claims by insurers.
• Providing firms the option to buy into business interruption payouts that are parametric in nature, with a trigger that is related to government leadership actions.  This plan would allow flexibility in payment amounts based on a firm’s upfront selection of benefit amount.
• Offering pandemic BI cover as a government subsidized optional cover similar to flood insurance offerings as exist with the NFIP. This seemingly would also be an indemnity-based claim option with the government as the funding source and contracted claim admin.
• Establishing a collaborative insurance/capital markets/government program that is parametric based, is meant as an immediate response mechanism to keep the SME economy going, and to serve as a potential adjunct to an updated, more uniform BI indemnity policy.

What is next?

It is clear an economic response must be planned and implemented as soon as the details are worked out, and it is clear that the outcome of the planning may be a hybrid plan. Regardless of which potential acronym plan is decided to be most acceptable, the subject proposal must:

• Be structured to distribute part or all of policy benefits upon notice or indexing of the covered occurrence/peril.
• Limit the need for an indemnity model adjustment- too burdensome for the insured, too expensive to administer for carriers, and too much time elapses between claim notice and payment to the insured.
• Be cautious to not build a program that requires carriers to administer claims first, distribute funds, then wait for government reimbursement. Having to front tens or hundreds of billions of settlement dollars is not as financially burdensome as absorbing the costs in full, but it is still costly in terms of time value of money and adjusting expense.
• Be comprehensive and flexible in maintaining records of named insureds, and transparent to all parties in what cover comprises and who insured parties are. Leverage available tech advances such as distributed ledger technology.
• Be administered by the industry as opposed to government, but subject to government scrutiny to the extent of government financial involvement.
• Leverage alternative risk financing methods to help diversify risk across many constituencies.
• Work toward making BI policy coverage verbiage uniform.
• Be a model program that might serve as a ‘deductible’ or hedge to encourage more available and robust traditional BI coverages.
• Focus primarily on SMEs as beneficiaries but have flexibility to support creation of captive programs for firms with greater financial needs.
• Be scalable up and down to respond to demand, allow creation of affinity group programs, and allow flexibility of scope of benefits.

COVID-19 has shown that pandemic risks have been off the insurance industry’s product radars to the point where programs simply did not exist, to the trillion dollar detriment of the economy. Has the industry learned there’s a need for a new approach for future like events? Seems so. Is there a realization that an innovative approach is needed for future events? One can hope.

A rush to a politically expedient option may not be the ultimate good solution. Patience and prudence are needed.