Legislation to nullify business interruption (BI) exclusions in some states could have disastrous consequences for the P/C insurance industry if passed, potentially wiping out up to 50 percent of insurers’ capital, warns a new Best’s Commentary.
Most U.S. commercial policies exclude losses caused by communicable diseases or viruses such as COVID-19. Despite these exclusions being well defined in contract terms, federal and state legislators are considering legislation that would force insurers to pay for two months of retroactive coverage on COVID-19-related BI losses.
AM Best believes that passage of this legislation would not only deplete the industry’s capital and surplus but could also lead to widespread insolvencies. It could also affect pricing, the availability of reinsurance and confidence in contract terms for years to come.
AM Best says that $633 billion of insurer surplus could be exposed to business interruption losses, basing its estimate on the combined surplus of commercial lines insurers and reinsurers that have exposure to commercial multiperil or property lines, as well as personal lines insurers that also underwrite commercial multiperil exposures.
The legislation could cost insurers $150-$200 billion per month in BI losses from businesses with fewer than 100 employees, AM Best says. This could result in an after-tax surplus loss up to 50 percent if insurers are forced to pay for two months of retroactive coverage. The insurers most at risk would be those that specialize and have concentrations in small to midsize business insurance.
To date, seven states (Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania and South Carolina) have filed bills that would require insurers to pay for BI coverage, regardless of whether pandemics were a covered peril under the policy terms. Most of these states are contemplating payouts to businesses that have fewer than 150 employees, though New York is considering a limit of 250 employees.
Many of these bills contain wording that allows insurers to seek reimbursement from a state’s department of insurance, but any reimbursement would ultimately come back from the industry in the form of assessments based on market share. Insurers would need to pass these assessments on to their policyholders, which could result in a significant increase in rates, AM Best notes.
The Best’s Commentary is: Legislation to Nullify BI Exclusions Poses Existential Threat to P/C Insurers