The pandemic of COVID-19 has impacted the world probably more than any other event since the second world war. Not since 1945 have we literally seen the entire world affected and disrupted as it is now. More than half the world’s population is in some kind of lockdown and are restricted in their economic and social movement. The Insurance Industry is not going to be unique and will be significantly affected by the pandemic and I believe certain insurance policies will be impacted permanently going forward.
I will concentrate more on non-life policies but it goes without saying that there will be and has already been many claims against life insurance policies, funeral and disability policies in what they call the epicentres of the virus such as Western Europe and The United States. Such policies rely on the fact that life insurance and disability claims will occur but not as a concentrated occurrence but rather be spread out in terms of actuarial tables. When a pandemic strikes worldwide, this is not the case. With regards to non-life policies, travel insurance, trade credit insurance and commercial business interruption cover are the most affected.
Now that COVID-19 has been declared a worldwide pandemic by the World Health Organization, losses caused by the disease are not fortuitous losses as is required by non-life insurance policies, they are losses guaranteed to occur and so all non-life insurers have taken out cover linked to COVID-19 on new policies being underwritten now. The issue is how to treat existing policies that were written prior to the pandemic sweeping the world. Trade credit policies specifically cover a policyholder’s ability to collect its trade debts. With the strict economic lockdown currently being enforced in many areas of Western Europe, Asia, the Middle East, the United States and even parts of Africa, it is clear that many commercial agreements are going to be breached simply because debtors are going to be unable to pay. Certain agreements will have force majeure clauses in them which effectively suspends the contract and the parties’ ability to perform and pay debts but those agreements that do not contain such clauses, will simply be breached and there will be many claims submitted to Insurers covering trade credit. Recovery in all likelihood will not be possible given that many businesses may not survive the lockdowns and those that do will take time to recover.
Business Interruption cover is normally a benefit which is linked to material damage cover provided in terms of another section of the policy such as The Fire Section (covering fire, floods and hail as examples), Buildings Combined or Electronic Equipment. There are specified perils named in these sections and without the perils occurring, business interruption cannot follow. The damage must also occur on the premises itself. This would mean that in the absence of any specific extensions to the policy covering infectious diseases and its impact upon the business, there will be no cover for the large business interruption losses that are currently being incurred in the economies of the regions mentioned above. Even those Business Interruption sections with infectious disease extensions, these extensions provide small limits and are still normally limited to the premises only, so a national lockdown of the economy forcing businesses to close will not be considered as being covered in terms of these extensions. This means unfortunately many businesses will not be able to look to their insurers to assist in these very trying times and if their national governments are able to help, they may end up in serious financial difficulty.
Health and travel insurers clearly are providing the cover but there are only a finite number of hospital beds available and so many health insurers are saying they model for claims which result in the hospital being full meaning their claims ratios will not be meaningfully affected. Also, outside of ICU treatment, there is very little other treatment available and many people are simply fighting the disease from their homes.
Let’s hope that a vaccine or cure will be available soon and that the economies of the world can get back to work. But it is certain insurers will be careful going forward in making sure all types of risks linked to medical pandemics will be excluded given there are likely to be more pandemics of this kind in the future.
by Danny Joffe : Chairman of Klapton’s Ethics, Nominations & Remuneration Committee