Forced retro BI cover will have 'destructive' impact on insurers' capital, warns AM Best

AM Best analysts suggest that industry capital backing US insurers and reinsurers writing business interruption (BI) insurance could decline by as much as 50 percent on an after-tax basis if legislated policy changes force carriers to pay for two months of retroactive coverage on COVID-19-related BI claims.

AM Best believes that forcing insurers to pay for COVID-19-related business interruption claims, despite any specific policy exclusions, could threaten many insurers’ solvency and reap disastrous consequences for the US property/casualty insurance industry.

The agency estimates that approximately $633 billion of US re/insurance companies’ surplus is exposed to BI losses, and the impact of legislation would lead to estimated monthly BI losses of $150-$200 billion for businesses with fewer than 100 employees.

As a result, a closure of two months would result in a projected after-tax capital and surplus loss of 37-50 percent. Additionally, many insurers could experience rating downgrades of multiple notches.

AM Best’s total BI exposure estimate is based on the combined surplus of commercial lines insurers and reinsurers that have exposure to commercial multiperil or property lines, and personal lines insurers that also underwrite commercial multiperil exposures.

“Legislation forcing insurers to pay for unintended business interruption losses would have a destructive impact on the industry’s financial strength and affect its ability to fulfill policyholders’ interests,” said Stefan Holzberger, chief rating officer at AM Best Rating Services.
“In the long term, retroactive coverage could affect pricing, availability of insurance and confidence in underwriting,” Holzberger added.

Many of the bills being considered include wording that allows insurers to seek reimbursement from a state’s department of insurance, but any reimbursement would ultimately come back from the industry in the form of assessments based on market share.

The insurers most at risk, according to the commentary, would be those that specialise and have concentrations in small to midsize business insurance.