usiness spends a massive amount on insurance to guard it against risks, and coronavirus is as big a disaster as there has been in a generation. But there is very little cover.
The utter failure of boards to demand the right insurance and the even greater failure of insurers and insurance brokers to supply it is a scandal.
We have the biggest single random event which is clearly insurable, but boards have focused on cost-cutting and removing “redundancy”, while the insurance industry is sitting on the sidelines, thinking it is not its problem.
It has form. For the past two decades, since 2001, insurers have made themselves increasingly unable to serve the needs of the real economy with good-quality insurance. British Steel, which collapsed at Scunthorpe last year, went bust when grappling with a number of challenges, including a crucial but disputed £20 million insurance claim which its advisers thought was legitimate. It was short of £30 million out of the £75 million it was seeking.
Insurance brokers are meant to guard the interests of the client but this does not work either. They have been decimated by cost-cutting, with more to come if Aon succeeds in its outrageous bid for Willis, so brokers don’t broke any more. They are just salesmen for the insurance companies, and some even have stakes in them. They may deny this but that is where they get a lot of their money.
Indeed Bruce Hepburn of Mactavish, a specialist insurance buyer and claims resolution expert who unusually works for the client not the insurance company, expects this practice to blow into the open when clients have to face huge increases in premiums. But it has not done so yet.
It used to be the case that insurance companies did not worry too much about underwriting profit because they made their money by investing the clients’ insurance premiums. But with the collapse of interest rates affecting their investment returns they have had to adopt a new model which emphasises underwriting.
This is even more in the headlines now as equities have crashed, bond spreads have widened meaning low-quality bonds are in trouble and companies like airlines, hotels, pubs, shops and travel are only just hanging on.
Investment returns will be terrible which means insurers will have to jack up premiums even more — in fact they are likely to rocket — in the months to come. They will want even more money for even less risk.
Chancellor Rishi Sunak and Prime Minister Boris Johnson gave the impression that business interruption cover would bail out SMEs and other companies if they were asked to close because of coronavirus. The Association of British Insurers, in a brazenly unsympathetic statement, said this was not the case for most clients because they did not have cover for contagious diseases.
Business interruption is normally only triggered by physical site damage — floods, fire and suchlike. Contagious disease cover is a special extension that only some buy or are even aware of.
However, even those who think they do have contagious disease cover may not have read the small print. For example, many clauses cover only a defined list of existing diseases, not new ones. Many cover only “notifiable outbreaks”, which are those the public health bodies are already monitoring at the time of the policy’s inception. The policy normally has sub-limits of at most a few million pounds.
Most policies are bought by large companies or multinationals, so the payout is likely to be a tiny fraction of the losses expected.The policyholder may have to prove contagion on site, or at most a few miles away.
If the company shuts down with no confirmed cases the chances are its claim will fail. There may need to be an official order to close a site. Johnson usually insists his measures are “voluntary”.
Also claims may be challenged by insurers as being a “wide area event” affecting a whole region.
They may argue that this cover is only for localised events. So the net position is that even those businesses who think they specifically bought contagion cover are unlikely to get insurers to pay up in full.
The lesson in all this, and why the insurance industry should hang its head is shame, is that while covid-19 is a new strain of virus, pandemic risk is nothing new.
In fact insurers have been modelling it for decades. After the Sars outbreak in 2003 the risks became abundantly clear. So the decisions to restrict cover were not made by accident