Economic reality sharpens future vision for insurance and pandemics


I have been writing about the potential and now actual insurance effects of COVID-19 since late February, and the discussion has evolved from what might be, to what is, to what is not, and to what is now how the industry must begin taking action on what might be for a next pandemic or other systemic risk. 

It’s no longer sufficient to allow coverage gaps to exist for global-effect occurrences, even if another like outbreak may not occur for years or decades- the economic shock presented by being unprepared is simply too great.


Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

The historic pattern is clear in how global economies react to systemic risk events- wailing, gnashing of teeth, rending of garments and governments stepping in to backstop the losses.  For the U.S. and elsewhere the needed government action is due to the outcome of businesses expecting their insurance policies to help cover economic losses due to the mandated shutdowns, and insurance companies never expecting BI losses to be part of insurance coverage.

As of this article’s writing the effect of COVID-19 is exemplified in the U.S. 2020 Q1 GDP results-   -4.8% on an annualized basis, coming on two months of growth and one COVID-19 affected March.  A similar result for Q2 would be unexpected as April and May could produce even less robust results.  Percents and projections, resulting in real-world declines of a few trillion dollars, and mirrored results in other countries.

Can a first step in planning be an understanding of the vagaries of business insurance and business interruption cover?  Not having easy access to policy forms for carriers outside the U.S. market we’ll just have to use the U.S. policies as exemplars.

Description of BI (Business Income or Business Interruption) coverage per U.S. carrier websites:

  • Carrier A– “Helps replace lost income and helps pay for extra expenses if a business is affected by a covered peril.” Lost income being described as revenues minus ongoing expenses.
  • Carrier N– “Helps you pay bills, replace lost income and cover payroll when a covered peril forces you to close temporarily.”
  • Carrier TH– “Can help replace any income your business loses if you can’t open for a time after a covered loss.” Income being total revenues less business expenses, operating costs.
  • Carrier H– “Will pay you the income your company would have made during the period it’s out of action due to a covered loss…including normal operating expenses incurred…most of employee payroll.” Income being revenue less normal operating expenses.
  • Carrier T- “Helps replace income and expenses.”
  • Or per ISO form CP 00 30 04 02
    • Business Income means the:
      • Net Income (net profit or loss before income taxes) that would have been earned or incurred; and
      • Continuing normal operating expenses incurred, including payroll.
      • Must be caused by direct physical loss of or damage to property…in the Declarations.

The carriers’ descriptions of BI cover seem similar, but each has its unique wording and intention.

To highlight varying benefits across the spectrum of the carriers noted above, consider a small business scenario as follows:

  • Monthly revenue- $25,000
  • Payroll- $15,000
  • Rent- $2500
  • Utilities/other expenses- $3500
  • Taxes- $2000
  • Net income- $2000

A one month disruption of the business due to physical damage to a covered loss, insured unable to conduct any business, payroll and expenses are continued, provides the following estimation of the BI cover outcomes:


$2000 BI cover, or $25,000?

Of course the devil is in the details of the policy coverage verbiage, but the tendency is clear- policies differ, there’s a significant variance between policies that cover loss of income alone versus policies that cover loss of revenue and ongoing expenses, or policies that cover ongoing expenses and loss of income.  What is uniform is that BI cover stems from, 1) a cause of loss a policy covers, 2) physical damage to covered property, and 3) no exclusions to coverage applying. Unfortunately, with COVID-19 the drivers of cover are not present in most BOPs and the BI costs are not covered.

That good first step in grasping the gravity of the coverage problem starts with the scenario noted above, and the economic effects extended to the U. S. business economy at large.

There are by estimation anywhere from thirty two to forty million businesses in the U.S., 99.9% being small/medium businesses, with an estimated thirty million being insured by business owner’s policies (BOP), and all being affected by COVID-19 shut down effect- some more than others but the majority affected entirely with full business interruption.

The potential BI data are stark:

  • Thirty million policies with a modest coverage limit of $50,000 would represent a probable maximum loss in a similar pandemic of $1.5 trillion.
  • Thirty million businesses claiming BI damages for one month- even if the claims average $20,000- equates to $600 billion.
  • Thirty million BI claims constitute an estimated $22.8 billion in adjusting expense.
  • Thirty million BI claims would require 600 million man hours to prepare, and
  • 300 million man hours to adjust, or ten man weeks for every claim staffer employed in the U.S. P&C insurance industry.

The U.S. is two months into a shut down, so the potential BI loss cost grows to $600 billion plus LAE (loss adjustment expense).  Want to guess what the entire amount of available cash and investable assets are for U.S. P&C carriers?  $1.75 trillion.  Considering these numbers- having business interruption cost financed by traditional indemnity insurance cover is as carriers have known- untenable.

However, insurance carriers cannot be blind to the economic effects of COVID-19 because they affect the viability of a large segment of the carriers’ business base- the SMEs. Economic pressures from legislators and litigation are presenting potential ex post facto cover, and if the outcomes pass constitutional muster the end effects are enormous in implication.  The inability of the industry to deal with the logistics of handling the claim demands are clear.

There must be plans to shift expectations from no response to some response, indemnity investigation to parametric,  avoidance of customer responsibility by all to collaborative and shared responsibility by insureds, insurers, the capital markets, reinsurers, and government.  Early efforts in the UK in devising a fund in parallel with Pool Re, France working on an insurance backstop for pandemics, and early U.S. efforts to craft a similar plan as the terrorism TRIA fund are meaningful, but absent serious consideration of parametric options not meant to solve the BI cover problem but to take a big edge off of it will carry the industry to a similar place as now.

There are additional efforts being made to build discussion; Lloyd’s Lab is sponsoring varied innovation programs focused on COVID-19 matters, and insTech London is in the midst of its sponsored podcast series on pandemics and what might come next for insurance (yours truly participating with Dr. Marcus Schmalbach , Laurie Miles and Matthew Grant in the 5/05/20 session).  These efforts as well as those of the nascent Ten C’s Project (more to come) are the counter to having no insurance response, or inconsistent, impractical indemnity programs that cannot apply as designed.

Thanks to commercial insurance agent Michael Porpora for the background discussion.

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