Navigating Business Interruption Insurance in the Pandemic Era: Challenges and Opportunities

The Uninsurability of Global Pandemics

Sean Kevelighan, CEO of the Insurance Information Institute (Triple-I), highlighted that global pandemics like COVID-19 are largely uninsurable due to their simultaneous impact on every community and economy. Unlike other covered catastrophes such as hurricanes or wildfires, pandemics do not have a limited time or geographic scope, making it impossible for insurers to price the risk efficiently. According to a report by the Triple-I, only 0.5% of business interruption insurance policies explicitly cover pandemics, leaving most businesses unprotected.

The Need for Direct Physical Damage

Standard business interruption insurance typically requires direct physical damage to trigger coverage. Since a virus does not cause such damage, most policies do not cover pandemic-related losses. This has led to a surge in litigation as businesses seek to retroactively interpret their policies to include pandemic losses. Data from the American Bar Association shows a 30% increase in insurance-related lawsuits since the start of the pandemic.

The Impact on the Insurance Industry

The insurance industry, a backbone of the economy, is concerned about the potential strain from retroactively covering pandemic-related losses. Insurers have already set aside capital for current claims related to hurricanes, wildfires, and civil unrest. A study by the Triple-I estimates that retroactively paying business interruption claims could bankrupt the industry within months. To navigate these challenges, businesses and insurers are exploring new models, such as parametric insurance, which could provide faster payouts without the need for direct physical damage.

For businesses, it is crucial to review and understand their insurance policies thoroughly. Engaging with insurance brokers to explore options like parametric insurance or additional riders for pandemics could provide better protection. For insurers, investing in technology to improve risk assessment and pricing models could help in managing future pandemics more effectively.