Business interruption insurance and pandemics
Not surprisingly, many business owners are upset to discover that their business interruption policies do not cover losses due to pandemics. Although it is easy enough to understand their frustration, it is important to understand the underlying economics. (Full disclosure, I worked in the property casualty industry for many years.)
The main business of insurance companies is risk pooling. They take premiums from (say) large numbers of drivers, and then use those premiums to pay claims for the small number of drivers who have accidents each year. What is essential to the viability of this business model is that risks are uncorrelated or independent: the chance that you have an auto accident must be largely independent of the risk that your neighbors do. If everyone has an accident at the same time, the premiums everyone pays will not come close to covering the accident losses. To some extent, of course, losses are correlated, and this can result in losses to insurance companies and their investors. For example, when it snows accidents go up and losses rise. Insurance company investors can bear these risks. Some losses that are correlated locally can be spread globally. This is what happens with the losses caused by hurricanes and earthquakes – they are pooled across the globe by reinsurance companies. But if losses are too widespread, large, and highly correlated they cannot be insured using the standard logic of insurance. My guess is that pandemic losses from business interruption fall into this category.
I haven’t seen an analysis, but I suspect that an effort to force companies to pay business interruption claims would impair or bankrupt many insurers and reinsurers.
Not to mention the losses the insurers have sustained on their investment of premiums over the last month.
Business owners:
If you have a question about coverages, the media, your retail agent, nor the wholesale broker has no right to tell you what is covered or not. It is the sole responsibility of the carriers by way of the lateral contract (policy) they issued to you, who is named on your policy declarations page to determine. If you feel that you are covered, make a claim. We in the insurance business cannot confirm nor deny any coverages that you feel you have, or any interpretation of the insurance policy you hold. That is between you and the carrier. We only facilitate the placement of your coverage to the carrier and provide the conduit.