Protecting businesses for the pandemic risk needs a government-backed cooperative solution

30 April 2020 — Daniela GHETU
Protecting businesses for the pandemic risk needs a government-backed cooperative solution
With hundreds of thousands of small and middle-sized businesses closed because of the anti-pandemic measures imposed by governments all over the world, business losses are spiraling, threatening to kneel a huge number of entrepreneurs. In search of survival solutions, many of these SMEs have turned to their business interruption insurance for relief. Yet, the typical policy excludes losses stemming from pandemics.

In 2018, there were slightly more than 25 million SMEs in the EU-28, of which 93% were micro-SMEs, with less than 10 employees and a turnover of less than EUR 2 million per year. SMEs accounted for 99.8% of all enterprises in the EU-28 non-financial business sector (NFBS), generating 56.4% of value added and 66.6% of employment in the NFBS, an European Commission report reads.

Most SME jobs are in the service sector. Smaller firms are found particularly in wholesale and retail trade, the hotel and restaurant business, communications and business services, and construction. In other words, a very large share of the European SMEs is active in the economic fields that were first hit by the general lockdown. Moreover, as the evolution of the health crisis in the coming months is foreshadowed at this time, they will also among the last to return to their regular functioning.

It is easy to understand the need for governments, as for the society as a whole, to find ways to protect SMEs as much as possible, as well as the scarcity of financial resources to do so at a time when all national budgets are overwhelmed by huge expenses. Yet, attempting to transfer towards the insurance industry the task to salvage SMEs by ordering insurers to pay for businesses' coronavirus losses no matter what the policy seems to say is NOT a wise choice.

The pressure exerted by the political world, as well as by media, on insurers to retroactively alter the contractual conditions and provide BI coverage to businesses for the COVID-19 related losses has built up for weeks already, with the most telling examples coming from the U.S., where several states' lawmakers have urged commercial insurers to pay businesses for losses stemming from the coronavirus outbreak, despite terms in the insurance policies that would otherwise bar coverage. Similar opinions were voiced also in the British Parliament and on other political stages. In addition, several collective legal actions against insurers over Covid-19 related business interruption claims are going on in different markets.

In response, the US insurance industry representatives said that, although they are working to assist their customers, BI policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19. Industry sources suggest that the cost of covering BI claims for small businesses could be USD 110 billion to USD 290 billion monthly. (Congressional Research Service) Other sources go as far as USD 220-USD 383 billion per month, or a quarter to half of the total industry surplus available to pay all P/C claims or 10 times the most claims ever handled by the industry in one year.

Out of the US, Swiss bank USB's latest estimates for non-U.S. business interruption go up to USD 7 - USD 22 billion, while total insured losses may reach as high as USD 30 - USD 60 billion.

Policymakers and business leaders will have to recognize that no insurance market in the world can cover such losses on its own, Director General of ABI, Huw EVANS has explained in a recent article.

In fact, the right solution is yet to be found. Most probably, as several sources suggest, only a kind of PPP arrangement, similar to the nuclear or terrorism insurance pools, might offer a viable alternative. "The state has to be front and center of such efforts but both globally and domestically, insurers should also be part of the discussion. If global pandemics are to be a more regular part of our world, we need to start talking about how to protect more businesses and individuals than has been the case with COVID-19," EVANS said.

For the time being, until our lives will return to a status closer to normality and the debate on the appropriate solution may take place, the focus should remain on the industry's financial stability, allowing insurers to fulfill their obligations towards customers under existing policies, by timely reimburse them losses caused by other risks that are not wiped off by the pandemic situation. "As such, retroactively changing the terms of policies would not be an appropriate way to address the large-scale financial impacts of the COVID-19 pandemic," as GFIA- the Global Federation of Insurance Associations stated recently.

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