A public-private partnership or an outright government program will be both necessary and warranted to help businesses harmed by COVID-19, A.M. Best said in new commentary.

One reason why: the ratings agency expects “significant reserve uncertainty” for the current accident year due to the struggle actuaries and CFOS face in accurately estimating COVID-19-related losses and the shutdowns that followed.

Stefan Holzberg, A.M. Best chief rating officer noted that the unique nature of pandemic risk leads to the need for government to intervene, at least in part, to help stabilize the market in the long term.

“Pandemic risk does not afford insurance companies any geographic diversification due to its global nature,” Holzberger said in prepared remarks. “Diversification by line of business also is not possible, as the current pandemic has demonstrated via the number of lines affected. Insurers may be able to offer limited protection against pandemic risks; however, these limits would be insufficient for a full recovery. Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses.”

Plenty of variables are adding to the uncertainty, A.M. Best noted, including the reality of social inflation, combined with lawsuits addressing liability policies, that will likely drive defense containment costs much higher. A.M. Best said court decisions will end up influencing actual claims payouts, making it difficult to determine the right reserve estimates and payout patterns.

In addition, a number of legislative and policy measures are under consideration that are designed to “nullify business interruption coverage exclusions in commercial property policies and force insurers to compensate policyholders for risks that were excluded during underwriting,” A.M. Best warned. As a result, insurers with less capital would be particularly vulnerable.

With those challenges in mind, A.M. Best said, any public/private partnership designed to address the resulting protection gaps “should take into account the capital supporting all risks insurers bear, which is critical due to the uncertainty inherent in taking on those risks.”

Insurers, in turn, while considering their capital needs, must consider the demands for each risk, plus the “assumptions about the level of diversification among these risks,” according to A.M. Best. “In addition, rating agencies and regulators require a specified level of capital commensurate with the level of risk the insurers have on their books.”

Any backstop proposals will likely face delays due to the U.S. election, however, and A.M. Best said it will continue to monitor developments as they unfold.

The full report is the Best’s Commentary, “Retroactive Legislation, Social Inflation: Credit Negatives for Insurers.”

Source: A.M. Best