Coronavirus: The Interaction Between a Pandemic and Insurance Coverage, Part III

“I said whatever it takes – and I meant it”. These memorable words from our Chancellor, Rishi Sunak, were made earlier this week as he unveiled his ‘unprecedented’ financial rescue package for the economy in response to the rapidly evolving coronavirus situation.

Further on in the same speech, he alsosaid: “let me confirm that, for those businesses which do have a policy thatcovers pandemics, the government’s action is sufficient and will allowbusinesses to make an insurance claim against their policy”. In ourprevious blogs on this topic, the position of most insurance policies onbusiness interruption has been explained, as there have been (and remain)misconceptions about the availability of cover; here, at last, is thegovernment’s recognition that insurance policies for coronavirus are not universal.In response to the Chancellor’s speech, the Association of British Insurers(ABI – the UK insurance trade body) said “the Chancellor’s statement todayis consistent with our statement this morning where we said in the eventbusinesses have the right cover, this type of notification could help make aclaim. But, as the Chancellor acknowledged, the vast majority won’t havepurchased extended cover and this remains unchanged.”

Prior to the Chancellor’s speech the ABIhad already clarified that standard business interruption cover does notinclude forced closure by authorities; it also stressed that irrespective ofwhether or not the government orders closure of a business, the majority ofbusinesses won’t have bought cover that will allow them to be compensated fortheir operations being halted by the coronavirus. As we’ve already described inprevious blogs, business interruption cover generally needs to be triggered byinsured physical damage.

Thus, to cover the financial effects of apandemic, specific insurance needs to be purchased . So, who has purchased suchinsurance? Seemingly almost no-one; in a report this week , insurance brokerMarsh reported no takers for its pandemic product launched in 2018. However,now the situation is obviously different with demand soaring.

Insurance is a risk mitigation tool, to be used to protect businesses and people from financial losses caused by extreme events; such protection can often be the difference between a business surviving or not. Yet our understanding of extreme events is framed by our experience of them. Therefore very rare events for most of us (such as pandemics, terrorist attacks or nuclear accidents) are often either not insured or under insured, because the perception is that ‘it won’t happen to me’, whereas events that we see and experience more regularly are fully insured (such as fires and car accidents). Typically, after a rare event demand for insurance products offering protection spike; for example insurance for terrorism increases dramatically after a high profile event but tails off as the memory of the event recedes and complacency sets in again. The sudden and almost universal recognition of the severe impact of coronavirus is what is driving new demand for Marsh’s pandemic product today.

One lesson from this coronavirus outbreak should be that, as part of their risk management process, businesses need to improve modelling for the ‘unknown unknowns’ and take a proactive rather than reactive approach to insurance purchases. It is certain now that the financial intervention demanded of the government during this crisis is going to be way beyond the means of the UK insurance market; nevertheless, there will be a few businesses that will claim for pandemic loss having bought the right product at the right time. The insurance may not respond for the full financial cost of the loss, but any claim payment could be a valuable financial contribution towards the survival of the business, so rewarding prudent risk management practice undertaken calmly and thoroughly before the event occurs.