Pandemic BI legal action may be tempered by potential re/insurance impact: A.M. Best

The ongoing legal action to force pandemic business interruption and shutdown claims from the Covid-19 coronavirus outbreak into property or catastrophe insurance and reinsurance programs may be tempered by an appreciation that this would significantly impact the global re/insurance market, A.M. Best believes.

A.M. Best has revised its outlook for the United States commercial insurance lines segment, to negative from stable, citing “concerns about the macroeconomic fallout of the physical distancing guidelines that have been initiated to slow the spread of COVID-19.”

A.M. Best cites an expected reduction in premiums in the commercial insurance space due to the economic conditions, as well as lower surplus or equity because of declining asset values, plus the prospects of interest rates staying lower for longer.

But, chief among concerns for commercial or business insurance in general, particularly in the reinsurance capital and insurance-linked securities (ILS) space, is the issue of business interruption and claims caused by the global shutdown of business operations due to the coronavirus pandemic.

The rating agency said, “Other than in the event cancelation and travel insurance lines, AM Best does not expect significant claims activity in commercial lines owing directly to the pandemic itself. However, the rapid deterioration of the economy, with unemployment claims skyrocketing and more than 90% of the nation’s population under “stay at home” orders as of this writing, will be felt throughout the commercial insurance segment.”

A.M. Best said it is monitoring ongoing business interruption (BI) legislative efforts in the U.S., although like many analysts it does not seem immediately all that concerned on this.

As we explained before, these legal efforts are expanding all the time and in some cases there are legal precedents that could mean insurers end up taking more business interruption claims from the Covid-19 coronavirus pandemic than initially thought.

Also, we released the results of our Covid-19 market survey yesterday, which found that the re/insurance and ILS market is particularly concerned on the risks for claims to leak through property towers and reinsurance programs.

“AM Best believes that, if any of this legislation were to be enacted, the courts would determine whether the legislation is enforceable or constitutional. The immediate impulse to spread the cost of pandemic-related economic losses to the insurance industry may be understandable,” the rating agency explained.

However, as we’ve also explained before, “Should legislators decide they want the insurance industry to pick up the coronavirus business interruption bill, they will likely need to backstop or fund the reinsurance industry to support the resulting claims payments as it’s in no ones interests to drive the re/insurance market under at this critical time.”

A.M. Best also believes that, in the U.S., should legislative efforts prove fruitful there will be a realisation that the impact of this could be extremely harmful to the industry.

Saying, “We believe that legislative remedies will be tempered by an appreciation of the effect they would have on the availability and affordability of commercial insurance products.”

While the U.S. business interruption issues are a concern, the industry may actually find itself more at-risk of facing pandemic BI and even CBI claims in other regions of the world, where reinsurance is sometimes more all-encompassing and can have far less well-worded exclusions (or none at all).