Pandemic Shutdowns: Insurers' Solvency at Risk?

Survey Reveals Industry Concerns Over Pandemic-Related Business Interruption Claims

A recent survey conducted by the Wisconsin School of Business and the Center for Insurance Policy and Research of the National Association of Insurance Commissioners (NAIC) has revealed that most insurance experts believe legislative proposals requiring insurers to cover business-interruption (BI) claims stemming from COVID-19 related shutdowns, even if the insurance policies exclude pandemic-related losses, threaten the solvency of the insurance industry.

Private Market Struggles to Efficiently Supply BI Coverage for Pandemics

The survey also found that most experts believe the private market will have a difficult time efficiently supplying BI coverage for pandemics, given the systemic, correlated, and non-diversifiable nature of the peril. According to a report by the Insurance Information Institute, the total cost of business interruption claims related to COVID-19 could reach $430 billion globally, a figure that far exceeds the industry's capacity to absorb such losses.

Federal Government's Role in Providing Coverage for Correlated Risks

Many survey respondents felt that only the federal government can provide coverage for correlated risks because it can spread the cost through taxation, long-run borrowing, and deficit financing. However, the pricing and affordability of coverage were indicated to be issues for both the federal government and the private market. For instance, the Terrorism Risk Insurance Program (TRIP) has been suggested as a model for pandemic insurance, but its effectiveness in addressing the unique challenges posed by pandemics remains uncertain.

In conclusion, while the private market may struggle to provide adequate BI coverage for pandemics, a federal partnership could potentially mitigate some of these risks. However, the affordability and effectiveness of such a partnership remain significant challenges that need to be addressed.

For readers, it is advisable to review their insurance policies carefully and consider additional coverage options that may be available to protect against pandemic-related losses. Staying informed about legislative developments and industry trends can also help in making informed decisions about insurance coverage.