Key COVID-19 exposures for the Canadian P&C industry: A.M. Best

The Canadian property and casualty industry is well-positioned to withstand the financial pressures exerted by COVID-19, but A.M. Best Company is nevertheless concerned about commercial premiums dropping due to business closures and coverage disputes over business interruption.

“In Canadian P&C, COVID-19 would have an impact on premium revenue in commercial lines,” Greg Williams, senior director for A.M. Best Ratings Services, said in an interview last week. “Some of these businesses may close and may never re-open, depending on how severe the downturn is. That is where the concern lies.”

The Oldwick, N.J.-based financial ratings firm is maintaining what it calls a “stable” outlook on the Canadian P&C industry for a number of reasons. For one, thing, “the industry maintains overall operating profitability, which has buttressed its already solid risk-adjusted capital,” A.M. Best said in a report released last week.

Some concerns about the Canadian P&C industry include negative pressure on auto premiums and motorists asking to reduce their coverage.

But “for the most part,” Williams told Canadian Underwriter, “I think our main concern would be on the commercial side.”

“Fewer miles driven means less frequency. Employment metrics are worsening. If only essential workers are on the road, frequency should go down. The impact would depend in part on how widespread stay-at-home orders become.”

There is also the question of business interruption losses.

“It appears as if most business interruption policies do not include pandemic,” said Williams. “However, there could be an increase in defense costs.” By this he means there is a potential for coverage disputes where the insured is suing the carrier alleging breach of contract.

Related: How Canada’s P&C industry will weather the economic storm from COVID-19

“Based on the limited data available in financial disclosures, coupled with the uncertainty surrounding the validity of BI claims relating to the coronavirus, it is impossible to know how much limit there is globally,” A.M. Best said in a statement. “Some property policies contain limited fungi, bacteria, or virus coverage. Such policy provisions can either limit or exclude coverage from losses caused by a virus.”

This, A.M. Best warns, can create ambiguity in coverage and disputes of this nature could end up in court.

“It is feasible that virus-related losses could be covered while bacteria-related losses are excluded,” A.M. Best says. “Insurers will likely continue to face potential BI and Contingent Business Insurance (CBI) claims until the COVID-19 situation abates. Carriers will need to examine which of their policies offer sub-limits, or if they apply manuscript endorsements, they will need to review the specific contract language carefully to determine if coverage was provided.”