April 9, 2020
While the full economic impact of COVID-19 won’t be determined for some time, one Moore School expert anticipates the impact of the pandemic on the insurance industry to be modest overall.
While health insurance claims will certainly skyrocket with the coronavirus, business interruption coverage won’t be materially impacted, said Robert Hartwig, Moore School finance clinical associate professor and director of the Risk and Uncertainty Management Center.
“Business interruption coverage, which is commonly purchased in the United States, is triggered only when there is actual, direct physical loss or damage to insured property from a covered cause of loss like fire, wind, explosion, smoke, etcetera,” he said. “Not only does COVID-19 not meet the definitions for ‘direct physical loss or damage,’ but it is also the case that interruptions resulting from the presence of (actual or suspected) viruses and bacteria are explicitly excluded. These same requirements and exclusions apply even if the closure of the business was ordered by government authority.”
Depending on the severity and the duration of the pandemic, Hartwig cautioned that one area that may impact property insurance coverage is theft and vandalism. If a business has to close and someone breaks in and steals their merchandise, insurance would pay the claim for the stolen items and the physical damage to the building. Any ensuing business interruption loss directly related to acts of theft of vandalism would be covered as well, Hartwig added.
Unlike with business interruption coverage, workers’ compensation claims will look different with the pandemic; instead of the usual physical injuries companies cover for workers’ compensation, health care workers will be filing a larger number of claims as a direct result of COVID-19 as they become infected while treating patients, Hartwig said.
One area will definitely see a major increase in claims due to the pandemic. While travel insurance claims are certainly increasing with the wider spread of COVID-19 and the increasing domestic and international restrictions, Hartwig said travel insurance is “a small corner of the overall insurance market.”
“Travel insurers will likely pay out millions of dollars for everything from canceled trips to policyholders becoming too ill to travel,” he said.
Because of the intensifying domestic and international travel restrictions and widespread business closures, Hartwig anticipates lower personal and commercial auto insurance claims with COVID-19.
“Less travel implies fewer accidents both in personal and commercial vehicles,” he said. “That said, with an expected sharp downturn followed by an abrupt economic recovery, claim frequencies will likely return to pre-pandemic levels relatively quickly.”
A number of major auto insurers are also providing refunds to millions of policyholders, passing along their savings to drivers in all 50 states, Hartwig said.
While much is unknown with COVID-19, including eventual overall mortality rates, Hartwig said the insurance industry is well capitalized and builds in the possibility of surges in mortality – including from pandemics, so even life insurers should not experience any financial distress as the pandemic continues and the death toll continues to rise.
“The most common method for managing excess mortality risk is through the purchase of reinsurance, which is insurance for insurance companies,” he said. “Once losses for the life insurer exceed a pre-specified limit, losses beyond that point will be paid – in whole or in part – by the life insurer’s reinsurer(s).”