Why Intact says most clients have no pandemic business interruption coverage

Fewer than 1% of the commercial property policies that Intact Financial Corp. writes should incur business interruption claims from the coronavirus pandemic, company officials suggested Wednesday. But the insurer has set aside more than $80 million to account for possible commercial claims specifically due to COVID-19.

“We do have specialized programs where pandemic business interruption coverage is extended,” said Darren Godfrey, senior vice president of commercial lines for Intact, during a conference call. The company’s executives were discussing the Toronto-based firm’s financial results for the three months ending Mar. 30.

But the specialized programs only apply to about 0.5% of Intact’s commercial property customers, CEO Charles Brindamour noted. For the other 99.5% of intact commercial property clients, business interruption coverage would not kick in unless there is physical damage to the property by an insured peril, noted Godfrey.

“Beyond this first line of defence, we have exclusions in our policy language that make it very clear that the inability to use or access a property – even in times such as this, in a lock-down – does not qualify for coverage,” Godfrey said, commenting specifically on the standard policy for Canadian clients.

“There are other elements of exclusion which I won’t get into,” Brindamour said when asked by an analyst about Intact’s exposure to business interruption claims. “We think that it’s extremely remote that we need to invoke the second and third layer of defence. If we have to, in an extreme scenario, there are other solid arguments to defend that position as well.”

Business interruption is a covered peril under Intact’s property cat reinsurance treaty, said Godfrey. “Assuming we do end up above our retention on multiple claims – and we are not of that view at this time today – we do believe that there is a reasonable scenario that we would present this as a reinsured event.”

Business interruption – with specific endorsements that would trigger coverage due to a pandemic – is one of four lines Intact had in mind when it set aside $83 million in reserves during 2020 Q1 for commercial claims arising from COVID-19. The other three lines were entertainment, tuition reimbursement in its United States business, and liability.

“When you look at liability, we potentially see an increase in the litigious environment in areas such as employment practices liability, financial services surrounding market volatility, just as a couple of examples,” said Godfrey.

Few actual claims have been reported to date, chief financial officer Louis Marcotte said.

Instead, the $83-million provision is Intact’s estimate of ultimate losses based on assessment of where COVID-19 could trigger an insured loss in commercial lines. The company plans to refine its estimate if necessary.

Of the $83 million in reserves, $50 million is in its Canadian business while $33 million is in the United States. (Intact acquired Minnesota-based commercial insurer OneBeacon in 2017). Business interruption is part of a commercial property policy, and not every Intact commercial client necessarily has property with BI attached to it, so only about 40% of Intact’s commercial book of business in Canada has BI.

Intact’s combined ratio in the latest quarter was 94.3%, a 7.2-point improvement over the 101.5% combined ratio recorded in 2019 Q1. Direct written premiums were up 14%, from $1.853 billion in Q1 2019 to $2.125 billion in the latest quarter.

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