General Insurance Article - Conundrum of Business Interruption coverage during pandemic


DBRS Limited (DBRS Morningstar) released a commentary entitled “P&C Insurance: The Conundrum of Business Interruption Coverage during the Coronavirus Pandemic” that discusses the impact of retroactively forcing property and casualty (P&C) insurance companies to assume business interruption losses in contracts that originally excluded pandemics as a covered peril.

 The key highlights include the following:

 Business interruption policies protect for the loss of income following a covered peril that precludes the insured from continuing regular commercial operations.

 Perils covered in business interruption policies typically include those that physically affect the premises of the insured, such as an earthquake, flood, windstorm, or fire.

 Most income losses caused by the Coronavirus Disease (COVID-19) are excluded from regular business interruption policies.

 However, there is increasing pressure on insurance companies to retroactively assume some of these losses.

 A hypothetical scenario where insurance companies are forced to cover business interruption losses outside the design of original contracts would threaten the solvency of the industry on a global scale, as well as negatively affect its liquidity profile. This would generate downward pressure on the financial strength ratings of P&C insurance companies.

 “Because the number of potential claims under such hypothetical retroactive changes would be extraordinarily high in the current environment, we estimate that this would have a material adverse impact on the capitalization of the industry globally,” says Marcos Alvarez, Senior Vice President and Head of Insurance at DBRS Morningstar. “Furthermore, this would have a negative impact on the financial strength ratings of P&C insurance companies, particularly those that focus on commercial lines, where business interruption coverage limits tend to be materially higher.”
  

 P&C Insurance: The Conundrum of Business Interruption Coverage during the Coronavirus Pandemic

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