”There’s a lot of panic at that moment that’s notwarranted. Short-term economic activity will contract and it will have animpact on global GDP, but it’s not like the world will end tomorrow.” These werethe words of global insurer Allianz’s CEO in late February; his words at thetime contrast with the decision on 12th Marchby Allianz’s wholly owned subsidiary LV= to stop selling travel insurancebecause of coronavirus . The Post Office, Insure and Go and others have alsoadvised they will restrict cover for or exclude claims from coronavirus afterthe 11th March. It seems a measure of panic has set in amongst insurers afterall.
Meanwhile thereare reports that many policyholders are shocked to find that their generalbusiness insurance policies mostly do not cover any of theincreasingly large financial impacts of this health emergency; as outlined inour previous blog, mostinsurance policies will not respond unless a specific cover extension has beenbought.
Given these andother recent headlines highlighting the insurance industry’s apparent desire tododge claims whenever possible, significant reputational damage to the sectoris likely. Without wishing to endorse individual insurer tactics during theseuncertain times, a defence and explanation of the general approach taken by theinsurance sector during this pandemic (and other similar events) isappropriate; here are some points to consider:
- There’s an old saying in insurance: ”You can’tinsure a burning house”. Insurance exists to cover the future occurrence ofselected fortuitous events; now that coronavirus is established it is acertainty that it is causing (and will continue to cause) significant financialloss. No insurer will offer new cover for the financial effects of the virusnow; it would be mad to do so.
- Most insurance policies issued to businesses coverrisks that cause physical damage and any resulting financial loss (businessinterruption – if purchased); the physical risks covered typically includefire, natural hazards, accidents, explosions and breakdowns. Adding subsequentfinancial loss comes at a cost, even for these simple physical damage risks.Our previous blog noted that some limited supplier and customer extensions tothis cover may be available, but these are contract specific and any extensionsof cover for (e.g.) pandemic will need to have been negotiated at the time ofpolicy preparation or renewal; generally insurers are wary of offeringfinancial loss cover without any initiating physical loss. Therefore, openended financial loss insurance cover for coronavirus impact, absent of anyphysical loss, will be rare.
- A conscious decision by a business to buy theseextensions to cover in advance is essential; the insurance market and widerfinancial services sector have rightly been held to account for mis-sellingcovers that are not required, desired or authorised, the most recent examplebeing PPI.
- Although many insurers are restricting or notoffering future travel insurance cover during the coronavirus emergency, itshould be remembered that they must honour any cover and claims up to the dateof any change of approach. Thus, in the case of LV=, the Post Office or anyother insurer, valid claims for coronavirus travel disruption made before 11thMarch should be covered.
- Insurance companies are private sector businesses;as such they are not bottomless pits of money and cannot just keep payingunlimited claims. They are capitalised in accordance with regulatory models andneed to manage their funds carefully. Policies are underwritten based onrealistic modelling of a wide range of scenarios; monitoring accumulation ofmultiple policies to specific events is of particular importance to prevent arun on funds. New events, such as coronavirus, challenge models and assumptionsand it is natural for insurers to exercise caution and restrict cover whenfaced with such uncertainties. In addition, most insurers invest premiums inthe financial markets; the recent rout of stock markets globally will havematerially dented their reserves, so causing further concern.
- Notwithstanding any restrictions of cover orperceived failure to offer ‘enough’ insurance, the sector will pay outsignificant claims for this coronavirus pandemic. Travel and cancellationinsurances will see significant claims as the impact spreads, as will specificpandemic covers purchased in advance as extensions to standard policies. Also,the credit insurance market, which provides cover for trading partnerinsolvencies, will see significant losses as a result ofthis virus outbreak.
It is easy tocriticise the insurance sector when it does not perform as many would like itto and undoubtedly it has often presented itself badly; however, as with manyother economic sectors, the impact of coronavirus on insurers will be bothchallenging and uncertain. It should be recognised that insurance cover isavailable for extreme events such as coronavirus for those businesses that arewell prepared and that practice good risk management – a vital tool foridentifying risks and potential gaps in financial cover. This work allows themto consider the best risk mitigation measures, including the advance purchase ofappropriate insurance cover for many unknown events – such as pandemics.
About the Author
Mark Tetley has wide experiencegained from senior positions across the London insurance market as both an underwriter and a broker , in a variety of sectors. Heprovides advice and assistance on a wide range of insurance and risk issues,including comprehensive nuclear liability and property insurance assistance,complex infrastructure project programme design and review, claims and policyreviews, assistance with project insurance design and implementation indeveloping countries, and many other aspects of risk mitigation.
Prospect Law is amulti-disciplinary practice with specialist expertise in the energy,infrastructure and natural resources sectors with particular experience in the low carbon energy sector. Thefirm is made up of lawyers, engineers, surveyors and other technical experts.
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