Broker Check

COVID-19 and Insurance

July 08, 2020

In its June 2020 issue Best's Review had a special section on COVID-19's effect on the insurance industry. We must recognize that this is an ongoing event and the views expressed may seem outdated six months from now; nevertheless it is time to take stock of the effects of this pandemic.

First of all, this is an unprecedented event. It has been described as "a hurricance that doesn't pass, a wildfire with no boundaries and a cyberattack that shuts down commerce". It will be the largest event in the history of insurance. As devastating as they were, 9/11 and Hurricanes Andrew and Katrina were localized. This is worldwide - 215 countries, over 250,000 dead (130,000 in the United States), a global recession.

The insurance industry has seen and dealt with pandemics before - SARS and Ebola, for example. The virus exclusion which is the source of so much controversy was a response to SARS. In 2013, pandemics were listed as the most extreme risk in a Towers Watson survey of insurance executives, but it dropped off the radar as the threat failed to materialize until this year.  

As with 9/11, the effects of COVID-19 reach across multiple lines of business. As with a cyberattack, it develops over a long period. Where it differs is in size. In May Willis Towers Watson estimated COVID-19 insurance losses in the United States and United Kingdom could reach $80 billion; as cases rise this may be conservative. In comparison, 9/11 insured losses in 2020 dollars were $47 billion and Hurricane Katrina losses were $52.8 billion.

Despite investment losses on top of mounting claims and lower premiums, the insurance industry is well prepared financially. The 2008-09 financial crisis taught the importance of liquidity. Both AM Best and III ran stress tests on insurers and found they have adequate capital. The American insurance industry has $800 billion in surplus. The elephant in the room - the 800 pound gorilla, if you prefer - is business interruption. Businesses and their lawyers have filed claims, and legislatures have introduced bills to force insurers to pay for losses which are excluded from policies. If passed, estimates of monthly losses range from $150 billion to $668 billion; this would deplete insurer surplus in two to six months and bankrupt the industry. The consensus is such laws would be declared unconstitutional, but litigation costs would be high. (The first case was just  decided in Michigan and the judge ruled for the insurer.)

Looking ahead, insurance will change. More losses will be adjusted remotely as technological advances become widespread. Policy language will be revised. Virus exclusions will become universal, with specialized limited coverage for pandemics. Parametric insurance for business  interruption is one solution, as is a government program modeled on TRIA.

With this crisis still ongoing, expect more developments.