Speaking to industry publication Insurance Age recently about the question of business interruption cover and Covid-19 The British Insurance Brokers Association’s executive director, Graeme Trudgill, explained why it is unusual to comprehensively insure these types of ‘fundamental’ risks.
“These are risks, mostly emanating from nature, that affects the vast majority of people and businesses. When these occur, they affect a large group of people meaning the resulting losses are incalculable and cannot be risk modelled or capitalised for, making them commercially uninsurable such as war and nuclear risks. Insurance is a mutual pool of funds that pay for the losses of the few, from the premiums of the many. Statistics on frequency and severity (cost) are used to maintain the pool, which is subject to regulation to maintain adequate solvency. Pandemics, by their unpredictable, unforeseeable nature, cannot be modelled in the same way and do not follow the ‘losses of the few’ principle. That is why they are not easily covered in a standard insurance market business interruption policy. The predicted cost of Covid-19 is likely to exceed any possible insurance model.”
Unsurprisingly, with the perceived likelihood by companies that cover would need to be called upon at very low levels and the expense considerable by comparison, demand for business interruption cover that included protection against unspecified diseases was previously very low. Likewise, a recent survey found that despite all the press coverage regarding severe cyber-attacks, only 11% of businesses purchased specific cyber cover.
BIBA has subsequently launched a pandemic response steering group made up of experienced industry professionals with the intention of formulating a plan to better cope with any potential future outbreaks of similar severity. The committee will make structural recommendations to government on how to best mitigate the enormous risk posed. No doubt a Pandemic Reinsurance initiative will be included in their guidance.
The committee will be able to draw up the example of the disaster risk-financing mechanism model utilised by Pool Re, which is a U.K. Government backed terrorism reinsurance facility providing property damage and business interruption terrorism reinsurance for its insurer members. It made sense for the state to intervene in order to provide financial backing and structural support for the greater good of the economy and in turn society when a business case for further capital investment by private companies just didn’t stack up. Flood Re can also serve as a template of when the industry collaborated and succeeded in implementing a creative solution to an issue that at one stage seemed an insurmountable obstacle.
In our previous blog we touched on how Business Interruption Cover Should be Solving Landlord and Leaseholder Gridlock.
In the current climate, given the events that have recently unfolded the pricing of a business interruption product that would provide a resolution for any solicitors representing tenants and/or landlords is unlikely. It would simply be unaffordable for many businesses. And we cannot expect insurers to reduce the costs when the evidence points to them facing bills for claims on an unprecedented scale. After all, they are not charitable organisations. Their ultimate aim is to generate value for their shareholders. It would be naïve to think that they would maintain an altruistic position and willingly foot the costs on behalf of society at a huge, potentially fatalistic loss to themselves.
It seems unavoidable that a government initiative is required to break the impasse on business interruption cover. We’ll probably learn the outcome of the FCA’s test case in the high court long before any agreement is reached. And it will probably be too late for the 1,000s of large companies and SME’s that have endured hard times due to lack of prompt, or any payment for that matter under the BI sections of the policies. Insurers may well be hoping that a sympathetic analysis of the situation by the court will encourage the Government to come to their aide? In the meantime, the insurance industry’s reputation is being dragged through the mud.
Ultimately a practical solution that works for businesses, landlords and insurers needs to be found to help them progress lease negotiations otherwise we’ll either remain in a deadlock for an indefinite period with vacant premises and entrepreneurs clutching business plans in frustration as they rapidly become outdated. Or the next time an adverse situation presents itself, such as the one we find ourselves in now, we’ll be back at loggerheads. And nobody wants the prospect of that again in the not too distant future! That’s why the insurance industry really needs to resolve its issues with business interruption cover quickly and implement a solution with the help of the Government. It should be ploughing its energies into expediting recommendations for a workable answer to the business interruption conundrum. The benefits of doing so will be far more significant for the economy than it would appear at first glance.
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