The time is now for non-damage business interruption insurance

The COVID 19 pandemic, and the government controls imposed as a result, have led to widespread disruption and business closures. This has resulted in a significant level of financial loss for businesses, particularly for small and medium sized enterprises (SMEs).

To seek relief, businesses have made claims for these losses under business interruption (BI) insurance policies. However, insurers have consistently retreated from paying out these claims, on the premise that business closures resulting from government orders due to pandemics are excluded from standard BI coverage, which mostly provides protections against physical damages (such as fires or floods). One of the main issues was the lack of clarity in insurers’ policy wordings, where pandemic impacts were not specifically excluded.

Due to the significant number of claims and the reluctance of insurers to provide pay-outs, regulators had to step in to seek solutions. For example, the FCA in the UK announced in May 2020 its intention to bring a test case to the High Court of England and Wales to seek legal clarity about the meaning and effect of selected BI insurance policy wordings. The FCA’s aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible.

In September 2020, the High Court released a judgment in favour of the majority of the arguments advanced by policyholders. The insurers represented at the ruling later appealed the decision to the Supreme Court. The latter ruled in favour of policyholders on the 15th January 2021, and dismissed the insurers’ appeals. This ruling sets a meaningful precedent, making it very challenging for UK insurers to deny cover, or reduce an indemnity otherwise due to an insured, in the context of non-damage business interruption (NDBI) caused by the pandemic. Consequently, UK insurers could be liable for £0.9 — £1.2bn of BI claims.

Similarly in the US, a Ohio court ruled in January 2021 against Zurich Insurance, ordering it to pay out on losses suffered by more than a dozen local restaurants that were subject to government lockdown orders. This ruling sets another strong precedent as the judge observed that coverage could reasonably extend to instances where a policyholder is unable to use an insured property for its intended purpose, and that “micro-organism” exclusions would not apply in the context of governmental measures. Zurich’s policy wording being comparable to wider industry practices, this has important implications for North American carriers, who are expected to be liable for similar losses.

From these different instances, we can infer that regulators and governmental bodies have shown a willingness to protect policyholders, in spite of the reluctance of incumbent insurers. Whilst this is welcomed news for affected policyholders, the coverage gap for BI losses remains tremendous: less than 1% of the estimated $4.5Tn global pandemic-induced GDP loss for 2020 (World Bank) will be covered by BI insurance (c. $30bn in annual BI premiums, c. 2% of global P&C premiums). Based on these figures, insurers would have to collect premiums for 150 years in order to cover the COVID-19 dislocation. More alarmingly, a majority of these BI policies only provide coverage against physical damage (such as fire), leaving an even bigger gap for non-damage protection.

By now, it should be clear that abundant and comprehensive non-damage business interruption coverage is urgently needed. It took nearly 8 months before insurers were forced to service claims by Supreme Court order in the UK. In this specific case, small and medium sized businesses could not afford to wait that long. Their very survival was dependent on financial relief, as a couple of months of missed cashflows meant imminent doom for a majority. In this sense, insurers failed to honour their “raison d’être”: protecting against uncertainties.

The reality is that these major economic dislocations are only going to become more frequent: it is estimated that pandemic-induced business interruption could cost as much as $23.5Tn over the next 30 years (Wall Street Journal), on the back of ever-increasing populations and globalization. The interconnectedness of global supply chains and digital infrastructures, rising social unrest, volatile political cycles and climate change are additional factors that will increase the occurrence of these non-damage events.

A meaningful solution needs to be found, one that allows a policyholder to benefit from a swift and transparent financial relief mechanism. In an era of technological abundance, traditional actuarial science needs to be enhanced to accurately predict and price these dislocations.

We at OTTRISK believe that combining machine learning and actuarial methodologies to engineer parametric insurance products are the key to solve this issue. We are designing insurance policies suited for SME business owners seeking protection against non-damage business interruption dislocations (such as government-induced lockdowns, triggered by a pandemic).

Our promise is to offer an affordable cover with a pre-determined indemnity range, and deliver a swift claims’ settlement process.

We hope to spark the beginning of a bigger movement that will lead to more innovative, public-private efforts to bolster society’s economic resilience.

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Whether you are an actuary, insurance underwriter, industry professional, business owner or if you want to share your experience with NDBI risks and the insurance industry, please reach out and share your thoughts with us: https://www.ottrisk.co/ // hello@ottrisk.co

You can also watch our latest interview on the latest ILS NYC forum here: https://www.youtube.com/watch?v=AQL-ACog6OU