P&C insurers expect BI losses from COVID-19 - but will be limited: KBW

Business interruption (BI) losses stemming from the coronavirus (COVID-19) pandemic are likely to affect property and casualty (P&C) insurers but the impact will be limited, according to Keefe, Bruyette & Woods (KBW).

Although far too early to estimate industry-wide BI losses amid the ongoing coronavirus outbreak, some losses are expected to materialise, but they will "disproportionately impact specialty rather than standard insurers", since the latter group’s policy language is typically subject to regulatory approval, and is usually more consistent, less customised, and hence less prone to including unintended coverage.

KBW analysis shows that insurers “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease,” as business interruption losses require covered physical damage to trigger a claim.

According to the financial services specialist, most of the insurance companies it contacted said that they expect "limited" BI losses despite increasingly likely slow GDP growth, specifically because of the virus exclusion.

KBW, however, noted that two recent developments could challenge that assumption. The first being that some policies may not require direct physical damage, may not exclude business interruption losses caused by communicable diseases, or may consider the virus’ presence as itself constituting physical damage.

Secondly, the New Jersey State Assembly recently introduced a bill that would require insurers to cover business interruption losses stemming from the coronavirus for insureds employing fewer than 100 full-time employees, even when the policy in question explicitly excluded virus-related coverage. Insurers could then apply for “relief and reimbursement” from a fund reflecting future assessments on other (non-life and non-health) insurance companies writing in New Jersey.

The New Jersey Assembly didn't end up voting on this bill yet, but KBW noted that if legislators can revise insurance policies to include coverage that was otherwise excluded, P&C insurers would bear some unexpected losses.

KBW’s Meyer Shields believes that continuing P&C share price weakness despite some recent interest rate increases reflects growing concern over P&C losses – including potential business insurance claims – stemming from the coronavirus.

Shields thinks that "retroactively rewriting insurance contracts (as considered by the New Jersey legislature) will ultimately prove unconstitutional, but investors should expect the combination of an aggressive trial bar, legitimately suffering insureds, and potentially ambiguous policy language to convey some (unquantifiable, at this point) loss exposure to the industry, probably falling disproportionately on specialty rather than standard insurers."

KBW explained that the initial reaction (which was Shields’ as well) assuming modest BI losses without an actual, covered property loss now appears "too optimistic", as he thinks that an aggressive trial bar will argue that in some instances, covered physical damage losses are either unnecessary and/or have been met.