New CAS Research Brief on Pandemic Business Interruption Risk

The Covid-19 outbreak has inflicted enormous pain and difficulty on a global scale. Many aspects of day-to-day life have been affected. Adding to the ordeal is the slow-down in the general business environment that has negatively impacted the livelihood of many and thereby, the quality of their lives and overall well- being.

In order to contain the pandemic, shutdowns were put in place without much forewarning, leading to a sudden and abrupt halt in business activity. The scale of this interruption was so huge and immediate that it shocked the business community, with enterprises big and small facing dire financial predicaments and left staring at an uncertain future. Small businesses and those that depend on in-person business transactions were heavily impacted.

To make things worse for these business owners, business interruption claims arising from the shutdowns were often declined by the insurance companies. As a result, insurers’ actions were challenged aggressively by policyholders, industry groups, and governmental bodies.

Numerous questions have been raised – why would insurers not provide payment? Has something similar happened before? What happens now? Were the policyholders incorrect in their expectations? They were hit by an unexpected event that they couldn’t control, which is a usual backdrop for insurance to step in and compensate. Why then did insurance companies deny the claims?

Let’s start with the obvious: pandemic business interruption was excluded by insurance policies. However, that is a shallow look at the issue. To fully understand it, and indeed to even start conversations around addressing this gap, it is necessary to travel to the foundations and history to discover what might lend support to that underwriting position. We take that journey in On Insurability and Transfer of Pandemic Business Interruption Risk, and study the business interruption using principles to test the tenets of insurability against pandemic business interruption risk. We look at the history of risks that have traditionally been hard to insure and draw parallels for an informed discussion. At the end of the day, the million-dollar – sorry, billion dollar – question is: who is going to pick up the cost? We attempt to identify those key players and discuss possible mechanisms of transferring the cost to them.

When we venture into the formative years of business interruption insurance, we realize that despite the insurance community spotting the need for this coverage early on, it took a long time to put together a formal insurance agreement, primarily due to a lack of standard accounting principles. With robust accounting in place, that challenge was overcome and numbers could be run consistently, spurring formal business interruption insurance. With a groundswell in debates around pandemic  business interruption, we have hit a roadblock again. If this risk is to be transferred away from the business owners, the insurance industry will need to play an important role in the design of practical solutions. We will need to clarify the arguments and relevant and meaningful analogies, to propel the discussions forward and enable timely actions. This will help restore policyholder confidence and preserve the large-scale popularity of business interruption insurance.

Encouraging accounts from the relatively recent history assure that this is achievable.  Several risks traditionally considered non-transferrable have indeed been managed to be transferred away; some only to the governments to start with, but also some to wider capital and private insurance markets. Since pandemic  business interruption has become a matter of public policy needing a prompt response, this could well be a potential template to embrace as a starting point, and a guide for future development.

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