Global Regulatory Responses to COVID-19

As the COVID-19 crisis ravages across the world, governments are confronted with difficult decisions on appropriate steps to curb the epidemic from the standpoint of population health and economic resilience.

Both angles are reflected in relief packages which are adopted or under consideration by various countries. As the crisis develops, governments turn more attention to the magnitude of current macroeconomic devastation, and the needs of the insurance industry cannot be overlooked.  

This epidemic is another reminder of how economies and markets are interconnected in the globalized world. For insurance companies, the resulting economic and stock market crises put them in a tremendous squeeze. Similar to the September 11 and 2008 economic crises, insurers’ investments in stock markets devalued in no time, forcing companies to exit to less profitable instruments as they try to rebuild balance sheets. Since its peak this February, the global stock market lost an estimated $20 trillion, comparable with the size of the U.S. economy, and the fall may continue as governments and legislatures ponder over a broad response to support citizens and the private sector.

The most affected, globally-oriented industries such as transportation, supply-chain, freight forwarding, and hospitality, put additional pressure on insurance, as their business interruption policies likely have a pandemic exclusion while pandemic exclusions apploy only to “notifiable outbreaks.” Thus, the crisis magnifies an unfortunate expectation gap when clients’ executive boards continue treating insurance as a fixed cost, without much regard to the cover quality. On the other hand, reactive response to global crises and increased price competition due to insurance product commoditization poised additional challenges. 

According to the Association of British Insurers, in the U.K. alone, businesses were paid $25 million in insurance claims per day in 2019. Buying routine insurance coverage for pandemics under current terms would be prohibitive to most companies. At the same time, forcing insurers to pay claims for contracts they never entered or delaying clients’ premium payments without government assistance would send the economy in further distress.

As governments review economic relief packages, it is worth setting a more positive agenda, based on previous success stories of copying with terrorism, flood risks, epidemics, or global economic crises. Adopting this approach, Mactavish, a London-based specialist insurance and claims resolution consultancy,  summarized a few policy options to alleviate the squeeze on our industry and give some breathing room to clients and brokers:

1. The government should consider providing loans to insurers to help support their cash flow and reserves. Insurance premium tax should be temporarily suspended.
2. Insurers should temporarily freeze increases in insurance rates. Insurance renewals should be automatic.
3. The government should loosen its capital requirements on insurers and explore ways to compensate insurers from losses incurred from these measures.

As countries unroll economic stimulus proposals, we can notice that most efforts have been focused on direct government-backed loans and guarantees for SMEs and affected industries, such as airlines and hospitality. As the crisis evolves, we have seen authorities start taking a closer look at insurance too. For example, European Insurance and Occupational Pensions Authority (EIOPA) issued a recent statement calling on the EU countries to relax industry reporting and disclosure requirements. A German proposal under review includes a solution to defer insurance and revenue taxes and provides a broad range for liability waivers. In the U.K., Chancellor Rishi Sunak reassured that policies covering pandemics will be honored, “but many businesses don’t have insurance – so we will go further.” It is yet unclear how the U.K. government stimulus will meet the insurance sector’s needs, but there were prior calls to introduce a TRIA-like backstop for business interruption related to pandemic risks.

Absent a substantial government intervention in insurance, we “could see insurers increase their premiums to recoup poor returns and improve their cash reserves, reject more claims, slow down the process of settlements, and stop providing cover in certain markets. They may also include more restrictions on the policies they do underwrite,” Mactavish CEO Bruce Hepburn said. In return, “with the right support from the government, insurers could also offer to freeze premium increases for the short-term.”

Indeed, when governments may be stepping in as insurers of last resort, in the spirit of shared responsibility, much work and education must be done for both clients and insurers. Again, brokers find themselves in an exceptional position to facilitate these efforts, as they have done with other emerging risks from cyber security to Ebola.