Best’s Commentary: Two Months of Retroactive Business Interruption Coverage Could Wipe Out Half of Insurers’ Capital

OLDWICK, N.J.--()--Industry capital backing U.S. insurers and reinsurers writing business interruption (BI) insurance could decline by as much as 50% on an after-tax basis if legislated policy changes force carriers to pay for two months of retroactive coverage on COVID-19-related BI claims, according to new analysis by AM Best.

Business interruption coverage is typically triggered by events causing direct physical loss or damage. To date, federal and state bills under consideration seek to retroactively require insurers to cover the loss of use and occupancy of physical premises, as well as the business interruption-related costs, regardless of policy language. These bills, which to date mainly are focused on smaller businesses, would sanction an interpretation that runs contrary to a policy’s original wording and require coverage that was never intended when the policy was underwritten and priced. AM Best believes that forcing insurers to pay for COVID-19-related business interruption claims, despite any specific policy exclusions, could threaten many insurers’ solvency and reap disastrous consequences for the U.S. property/casualty insurance industry.

A new Best’s Commentary, “Legislation Aimed at Nullifying BI Exclusions an Existential Threat to P/C Insurers,” estimates that approximately $633 billion of U.S. (re)insurance companies’ surplus is exposed to BI losses. Per AM Best’s calculations, the impact of legislation would lead to estimated monthly BI losses of $150-$200 billion for businesses with fewer than 100 employees. As a result, a closure of two months would result in a projected after-tax capital and surplus loss of 37-50%. AM Best’s total BI exposure estimate is based on the combined surplus of commercial lines insurers and reinsurers that have exposure to commercial multiperil or property lines, and personal lines insurers that also underwrite commercial multiperil exposures.

A significant number of companies would see their Best’s Capital Adequacy Ratio (BCAR) transition downward under expanded BI coverage. While BCAR assessments are not the sole determinant of an insurer’s balance sheet strength, one of the building blocks of AM Best’s rating process, a significant deterioration in the BCAR assessment could lead to the downgrade of an insurer’s credit ratings. Based on AM Best’s analysis, many insurers could experience rating downgrades of multiple notches.

“Legislation forcing insurers to pay for unintended business interruption losses would have a destructive impact on the industry’s financial strength and affect its ability to fulfill policyholders’ interests,” said Stefan Holzberger, chief rating officer at AM Best Rating Services. “In the long term, retroactive coverage could affect pricing, availability of insurance and confidence in underwriting.” Many of the bills being considered include 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 likely would pass these assessments on to their policyholders. The insurers most at risk, according to the commentary, would be those that specialize and have concentrations in small to midsize business insurance.

A video discussion with Holzberger about this commentary also is available at http://www.ambest.com/v.asp?v=ambbi520.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=296835.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2020 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

Contacts

Stefan Holzberger
Senior Managing Director
and Chief Rating Officer
+1 908 439 2200, ext. 5380
stefan.holzberger@ambest.com

Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
christopher.sharkey@ambest.com

Sridhar Manyem
Director, Industry Research
and Analytics
+1 908 439 2200, ext. 5612
sridhar.manyem@ambest.com

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644
james.peavy@ambest.com

Contacts

Stefan Holzberger
Senior Managing Director
and Chief Rating Officer
+1 908 439 2200, ext. 5380
stefan.holzberger@ambest.com

Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
christopher.sharkey@ambest.com

Sridhar Manyem
Director, Industry Research
and Analytics
+1 908 439 2200, ext. 5612
sridhar.manyem@ambest.com

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644
james.peavy@ambest.com