March 24, 2020 by David Gambrill
Will COVID-19 cause Canada’s property and casualty insurance industry to start introducing pandemic business interruption coverage, in much the same way Calgary’s 2013 floods prompted the industry to introduce overland flood coverage into home insurance policies?
Don’t count on it.
The epic size and scale of pandemic exposure — not to mention the unique characteristics of each pandemic — would make it virtually impossible for the industry to offer blanket pandemic coverage to businesses at affordable rates.
“Business interruption was never designed to respond to pandemics,” Colin Simpson, president and CEO of the Insurance Brokers Association of Ontario (IBAO), told Canadian Underwriter Tuesday, when asked if pandemic coverage might follow the same kind of trajectory as overland flood coverage after the 2013 flooding in Calgary. “It’s generally linked to named perils within a policy, like floods and fires, for example. There’s a business interruption element to that, but a pandemic is something totally different…
“If you were to look at it through a different lens, in the future, could the insurance industry respond to it [pandemic risk]? The answer would be no, unless there are sufficient funds on the balance sheet to pay out claims of this magnitude. And we can see from the press that there are a number of businesses that are being interrupted.”
Canada’s government has put together an $82-billion aid package to help businesses and workers cope with a looming economic recession, triggered by “social distancing” policies that are designed to slow down the spread of the novel coronavirus (the cause of COVID-19). By way of comparison, an earthquake in Canada (an insured peril), is estimated to cause insured damage losses of $20 billion to $30 billion.
The difference is that earthquakes and floods have territorial limits to damage, whereas pandemics do not.
“With a flood, generally you can map out where the risks are,” said Simpson. “I think for pandemics, that would be incredibly difficult. The challenge with this pandemic is that it is very difficult, from what we can understand, to know who it’s going to affect and how quickly it’s going to spread.”
The question for an underwriter would be: What kind of information is available that would allow an underwriter to define the pandemic risk, quantify it, and then price it?
And then there is the question of whether pandemics are predictable enough that they could be priced as a generalized peril. As Simpson observed: “I think the problem with pandemics is that even if you understand what’s happening with COVID-19, that does mean that the next pandemic follows the same path or will behave the same way.”
Ultimately, Simpson said, “you need to identify the risk, quantify the risk, and then — if you can define it and quantify it — you have to figure out whether you can price it. And then, once you’ve priced it, you need to determine whether it’s affordable. If it’s a risk that affects society, is it a viable proposition? This is where your governments come in. To help stabilize our society.”
Some within the Canadian broker community have noted that European insurers are quite open about where they stand about denying pandemic coverage.
“Standard business insurance policies are designed and priced to cover standard risks and are therefore very unlikely to provide cover for the effects of global pandemics like Covid-19,” the Association of Business Insurers (ABI) states on its website. “This includes forced closure by the authorities.
“Businesses may have chosen to purchase cover that will specifically provide for business interruption arising from notifiable or infectious diseases. For certain notifiable disease extensions, cover may apply if other policy conditions are met. However, this type of extension is not commonly included as standard.”
In Canada, Insurance Bureau of Canada notes that “generally, commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19.”
But as is common in the P&C industry, there are exceptions. “Some organizations may have purchased specialized contingent business interruption coverage, standalone business interruption coverage, and supply chain disruption coverage [that] may be triggered as a result of the World Health Organization’s declaration of a pandemic,” the IBC notes. Simpson adds that “some coverages out there are offered by insurance companies that cover off business interruption expenses specific to pandemics.”
Examples of business interruption expenses – in this example, named as “additional expenses” under an insurance policy for named perils (not for pandemics) – include outsourcing work, temporary hydro, internet and telephone connections, advertising, rentals, or the cost of moving to a different location.
The bottom line is that each commercial insurance policy is unique, and so brokers and insurers recommend that their clients talk to them about what is included in (or excluded from) their business interruption coverage.