DBRS Morningstar Releases Commentary on Business Interruption Insurance during the Coronavirus 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.”

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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