INTERVIEW: Forced retroactive business interruption ‘not same’ as TRIA

“They won’t just say ‘hey, sure we’ll pay all that’. They are also going to fight to the death.” Mike Vitulli, senior vice president and director of risk management at Risk Strategies.

· Insurers do not have financial clout to pay for everybody’s business shutdowns
· ‘Triple effect’ to hit industry already in midst of harder market
· State of New York already has existing virus exclusion
· April renewals show first signs of beefed up virus clauses

Insurers are taking protective measures to limit their exposure to the COVID-19 pandemic and future outbreaks, but there are still chinks in this armour, argues one experienced industry leader.

Comparisons between proposed legislation to force insurers to pay retroactive claims for COVID-19 business interruption and ‘backstop’ cover under the US Terrorism Risk Insurance Act (TRIA) are not justified, according to Mike Vitulli, senior vice president and director of risk management at Risk Strategies, as he outlined the biggest issues the pandemic presents for the industry.

In 2002, TRIA created a federal ‘backstop’ for insurance claims related to acts of terrorism. Legislators in a number of US states, including New Jersey and Massachusetts, have now proposed forcing insurers to provide retroactive COVID-19-related cover, and payouts, that do not exist under current insurance contracts.

Leaders across the industry have warned of the threat this poses to the future of the industry.

Vitulli said: “The biggest issue for insurers is the unknown, and waiting on the legislature—whether it’s state, federal or worldwide—to enact some sort of retrospective attempt to force them to provide the coverage that they did not offer.
“If you’re one of these companies you do not have the financial mechanisms or financial backing to pay for everybody’s business shutdown across the globe.”

Insurers may have a certain amount of capital surplus, he said, but: “It’s tied up with other things, let’s just call them regular claims.”

Even if governments were to offer insurers a TRIA-like backstop “the sheer processing costs would be an unbearable experience for them”, he added.

“People try to compare it to the TRIA terrorism experience, and in the UK there’s the reinsurance pool for terrorism, like the TRIA model. It is not the same as forcing retroactive business interruption cover because TRIA wasn’t intended to affect everyone.

“COVID-19 business interruption could potentially affect millions of businesses in the US and the UK, and around the world, and would be untenable for everybody to try to process,” he said.

More to come
In spite of the risks to the insurance industry, Vitulli “absolutely” expects to see more retroactive business interruption cover proposals like those in New Jersey.

“Everybody is trying to figure out where to get money from and it’s always the insurance companies which appear to have deep pockets. But let’s not forget their lobbying community is fairly strong.

“As people have said, ‘it’s an existential threat’, and they will not allow that to go quietly into the night. They won’t just say ‘hey, sure we’ll pay all that’. They are also going to fight to the death,” he said.

The April 1, 2020 renewals are showing the first signs of an industry steeling itself for an onslaught.

“What we’re already seeing is that for April 1 renewals and beyond, reinsurers are looking to draw up not just virus exclusions but specifically COVID-19 exclusions into their insurance treaties, and then of course that gets passed back to our primary insurers,” Vitulli explained. “We’re already seeing examples of that across the spectrum of insurers.”

Evidence of this is being seen in general liability where, he said, “it wasn’t as big a deal but they’re very concerned”, and in property as well.

Vitulli pointed to New York as an example of a state where there’s already an existing virus exclusion that most policyholders have. However, he added: “It’s not everywhere and not on every property or general liability policy. So you will probably see more specific wording that prohibits claims arising out of COVID-19 for anything after April 1.”

COVID-19’s impacts on professional liability in terms of the claims people are going to make is another concern. He said this is expected to centre on negligence claims against hospitals and doctors, and nursing homes, especially in the US.

“I think you will see substantial claims from estates and heirs, people who are claiming negligence from the people who run those facilities.

“I expect a combination of much narrower coverage going forward and our clients looking to decide where it comes from because of the reinsurers narrowing their coverage offerings,” he explained.

Triple trouble
Vitulli also foresees a need for even larger government stimulus packages than the $2.2 trillion confirmed in the US and the £330 billion in the UK.

“My concern is that insurers were already in the midst of what we were calling the harder market, so they were increasing prices,” he said.

A "triple effect" will hit the industry, he said. "First, there will be a lack of investment return because interest rates are at zero, near zero interest rates or negative interest, which makes their underwriting that much more critical.

“Second, there will be a loss of revenue because a lot of clients are simply not paying premiums because they’re shut down,” he said, meaning insurers and brokers are going to see their revenues “drop precipitously” based on a smaller economy."

And third, "insurers will still be facing claims, although there will be fewer day-to-day claims because businesses are closed".

“From my perspective they’re looking at less premium, much narrower underwriting focus, and maybe retrenching based on the fact that they want to look at where they deploy their capital because they’re not making the 7 to 10 percent on return, they’re making very little. It’s vital for them to use their capital in an effective manner.

“I’m not sure that stimulus is going to change it enough, at least between now and the end of the year,” he said.
Injured workers are another issue to watch, Vitulli said, as the US does not have coverage for injured or sick workers or workers’ compensation.

“I think we’re going to see a lot of legislative action there as well to try and get coverage at least for first responders and the medical community.”

Pointing to employers’ liability in the UK as another example, he said: “We are setting people up for a lot of future liability based on being forced to work as ‘essential’ or ‘not essential’, and questions like that.

“On both sides of the pond there is a potential issue down the road for people who are in the transportation, distribution and food service work, where you’re deemed essential so you’d better keep working. Those people get sick, what happens? That’s probably my second biggest concern,” he explained.

Massachusetts is an example where legislators put a bill on the table to make it clear that first responders and healthcare workers on the emergency side are completely covered.

“Most of the states in the US have some weasel wording for allowing the workers’ comp statute to include healthcare workers if they get sick, but by and large most regular workers wouldn’t be covered even if they could prove it was work-related,” he said.

The same issue exists in the UK, to a degree. “The UK has the National Health Service so people have medical cover when they get sick, but they don’t have the loss of wages cover and we know that under employers’ liability people would then have to sue their employer and prove it was work-related.

“Do you really want a whole country suing employers to try to get money because they got sick at work?”

Reasons for optimism
While there is a lot to be wary of in the short term, Vitulli is more sanguine about the industry’s prospects for the longer term.

“I’m old enough now to have lived through market shocks like this three or four times. And as much as we like to think insurers are long term-focused, in fact they are very quarter-to-quarter profit-focused.

“They’ll put in some additional exclusionary wording, they’ll retrench for between three to 12 months, then eventually they’ll start to realise they can make money and as soon as they make money, they will start to jump back in,” he said.

“As I said, the real issue for insurers is the unknown. As soon as they get a handle on what they can and can’t underwrite to, where claims are going to come from, what they are going to get, and what they can charge, it’ll come back,” he added.

However, the comeback “won’t be December 1, 2020”, he said. “It’ll probably be next year or the year after, but they will eventually, just like they did with terrorism, come up of ways of dealing with COVID-19 and we will go on.

“Two years from now they’ll forget it ever happened. And maybe there will be some better business continuity planning, and companies out there that do a better job of planning for disruption."