This note provides an overview of how business interruption insurance against pandemic risk could be provided with support from governments, and some of the challenges and considerations necessary for establishing such a programme.
The COVID-19
pandemic and the measures taken to limit the spread of the disease have
significantly disrupted economic activity in countries around the world,
resulting in significant business interruption losses. The vast
majority of these losses are likely to be absorbed by policyholders as,
unless governments (or courts) intervene, few companies have business
interruption coverage that is likely to respond to these types of losses
– exposing the existence of an important protection gap for some
pandemic-related business interruption losses.
The
closure of manufacturing plants, restaurants, retail establishments and
other places of business to limit the spread of COVID-19 has resulted in
significant business interruption losses. The vast majority of these
losses are likely to be absorbed by the affected businesses as: (i) many
businesses have not acquired coverage for business interruption losses;
and (ii) unless governments (or courts) intervene, few of the
companies that have acquired business interruption coverage have
coverage that is likely to respond to these types of losses (see the
OECD’s Initial assessment of insurance coverage and gaps for tackling COVID-19 impacts for a more detailed assessment of the insurance coverage available for COVID-19 related losses).
In
response to the current crisis, policymakers in a number of
jurisdictions are examining various ways to support commercial
policyholders (particularly small and medium-sized enterprises (SMEs))
in the context of the uninsured business interruption losses that they
are facing or are likely to face as a result of the current COVID-19
pandemic. Policymakers are also beginning to examine longer-term
solutions to address the gap in financial protection for
pandemic-related business interruption that has come to light as a
result of the current crisis.
This
note provides an overview of the initial responses to the likely
business interruption protection gap for COVID-19 and a discussion of
how business interruption insurance against pandemic risk could be
provided with support from governments based on the experience of other
catastrophe risk insurance programmes.
COVID-19 business interruption protection gap
Businesses
across many sectors of the economy have faced a significant decline in
revenue as a result of government directives to close their businesses
in order to slow the spread of the virus among employees and customers.
Most governments have implemented programmes to support businesses that
have faced significant disruption as a result of COVID-19, focused on
ensuring the availability of financing for businesses or income for
their employees. Some commercial property insurance policies also
include coverage for business interruption losses which provides
policyholders with protection against some of the losses that they incur
when their business is forced to close, subject to the terms and
conditions of the individual policy.
Insurers
and their associations around the world have indicated that most
policyholders have not acquired insurance coverage that will respond to
the business interruption losses that result from COVID-19 business
closures. In most countries, business interruption coverage is provided
as an optional coverage attached to commercial property insurance that
is often (but not always)1
triggered only as a result of damage to physical property. In addition,
in a few countries and policies (notably, in the United States), an
exclusion was developed (more than 15 years ago) and has been applied
with the aim of specifically excluding coverage for losses due to virus
(or bacteria). Some explicit coverage for business interruption losses
resulting from a pandemic has been made available as endorsements or
specialty coverage although take-up of this explicit coverage has been
limited (see Box 1).
Box 1. Insurance coverage developed for pandemic (and non-damage) business interruption
Some
insurance products have been developed to offer explicit coverage for
business interruption losses suffered as a result of an infectious
disease outbreak, either as a specialty stand-alone policy or as an
endorsement to a policyholder’s existing business interruption coverage.
In 2018, for example, a specific coverage for financial losses due to
outbreaks, epidemics or pandemics was made available (Marsh, 2020[1]) although there has reportedly been almost no take-up (Collins, 2020[2]).
The
Insurance Services Office in the United States developed two optional
endorsements for commercial property policies applicable to business
interruption losses as a result of business closures related to COVID-19
in February 2020 although it is too early to determine whether insurers
will seek to offer that coverage (Barlow, 2020[3]).
There are also a few commercial insurance policies that specifically
include pandemics as a covered peril in some markets (such as a property
and liability policy tailored to dentist practices in Canada) (O’Hara, 2020[4]).
In addition, some coverage has been developed for non-damage business
interruption which is meant to respond to any interruption to business
that does not involve physical damage to the insured premises or a
building in proximity to the insured premises (which would include
pandemics unless specifically excluded under the terms of the coverage).
However, non-damage business interruption remains a specialty coverage
with limited penetration.
Responses to the COVID-19 business interruption protection gap
A
number of insurance supervisors are assessing the potential for
business interruption coverage to respond to losses incurred as a result
of COVID-19 related business closures. In the US state of Washington,
for example, the Office of the Insurance Commissioner undertook a review
of policy wordings offered by 84 insurance companies and found that
only two insurance companies offered coverage for a pandemic in their
base policies while 15 others offered limited coverage through
endorsements to other policies (Washington state Office of the Insurance Commissioner, 2020[5]).
In France, the Autorité de contrôle prudentiel et de résolution (ACPR)
requested information from approximately 20 insurers (accounting for a
significant portion of business interruption coverage in the French
market) and found that only 2.6% of these companies’ policyholders had
explicit business interruption for a COVID-19-type event while a further
4.1% had coverage that could potentially respond (i.e. their policy
wordings did not provide certainty on coverage) (ACPR, 2020[6]).2
It
appears that many policyholder claims for COVID-19-related business
interruption losses are being rejected by insurance companies. For
example, in the United Kingdom, a survey of hospitality-related
businesses found that less than 1% of hospitality businesses, 3% of
innkeepers and 4% of beer and pub businesses had received a positive
response from their insurer regarding business interruption coverage for
COVID-19 related closures (Gould, 2020[7]).
Some insurance companies have responded by offering additional coverage
or making voluntary payments to support businesses affected by
disruptions as a result of COVID-19 (see Box 2).
Box 2. Voluntary payments and coverage extensions for business interruption losses
In
a few jurisdictions, insurance companies are offering additional
coverage or making voluntary payments to support businesses affected by
disruptions as a result of COVID-19. In Switzerland, a number of
companies have agreed to voluntarily compensate their policyholders in
the restaurant sector for some business interruption losses. In the
German state of Bavaria, insurance companies have agreed to provide
voluntary compensation for 10%-15% of the normal daily cost of business
interruption to policyholders in the hospitality sector (Bayerisches Staatsministerium für Wirtschaft, 2020[8]). At least one German insurer will reportedly provide similar compensation to all of its German policyholders (Huebner, 2020[9]).
In France, insurance companies announced that they will collectively
contribute EUR 400 million to a solidarity fund for affected businesses (FFA, 2020[10]) and some insurers are reportedly providing small firms with ex-gratia payments (Huebner, 2020[9]).
In South Africa, a number of non-life insurers have agreed (as part of a
discussion with prudential and market conduct regulators) to provide
interim payments to some or all policyholders with a potentially
relevant coverage for infectious diseases while legal certainty is being
sought on the applicability of coverage (FSCA, 2020[11]).
According
to the Italian insurance association (Associazione Nazionale fra le
Imprese Assicuratrici (ANIA)), insurance coverage for business
interruption is not common on the Italian market, particularly among
SMEs – and where acquired, it may only be triggered as a result of
physical damage to the insured premises. As a result, Italian SMEs
subjected to closure orders (e.g. retail shops, bars and restaurants and
various types of service providers) were unlikely to receive any
insurance payments for the losses incurred as a result of the closures. A
group of insurance companies responded by designing a coverage
extension to provide affected SMEs with a daily allowance valid for up
to 15 days of ordered business closure.
In
addition, insurance companies in many jurisdictions are providing
various forms of support to policyholders, including businesses, such as
premium grace periods and refunds and flexibility in terms of coverage
interpretation (see the OECD report on Insurance Sector Responses to COVID-19 for an overview of these initiatives).
The
absence of (or uncertainty regarding) coverage has led (and will
continue to lead) to a large number of disputes between insurers and
their policyholders which is likely to take months (if not years) to
resolve. For example, in the United States, over 1 000 COVID-19-related
insurance coverage lawsuits have reportedly been filed (as of August
2020) with early outcomes suggesting different judicial interpretations
of key issues and limited potential for any consolidation of proceedings
(Covington, 2020[12]).
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