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Law360, London (October 27, 2020, 3:41 PM GMT) -- Property and casualty insurers have nowhere near enough money in their coffers to cover claims for losses resulting from business interruption during a pandemic such as COVID-19, and would have to collect premiums for 150 years to fill the hole, new research shows.
Data published by the Geneva Association, an international think tank covering the insurance sector, in collaboration with the University of St. Gallen in Switzerland shows how the COVID-19 crisis has hit insurance coverage.
Property and casualty insurers fell far short of the capacity needed to shoulder the projected global losses suffered by businesses, the report suggests — more than $4 trillion for 2020.
Insurers have collected just $1.6 trillion in annual premiums so far this year — less than half what they could have to pay out — and took in just $30 billion for business interruption policies, the report said.
"The pandemic exposed a massive protection gap in the area of business continuity risk," Jad Ariss, the Geneva Association's managing director, said. "We need to find sustainable solutions which harness the industry's potential contributions while maintaining its solvency and viability."
Kai-Uwe Schanz, the leading author of the report, said the protection gap is a result of the fact that business losses linked to the pandemic are unlike any other form of cover.
"Unlike risks like natural catastrophes, they occur on a global scale and are not diversifiable," Schanz said. "Governments and insurers urgently need to figure out the right partnership modalities to prepare for – and respond to – extreme risks like pandemics."
The report said that insurers have an important role to play in filling the protection gap but that this must be done in collaboration with governments. The Geneva Association said it plans to publish another report investigating how the public and private sectors should work together to fight pandemic risks.
Ariss said that insurers stepped up when the pandemic hit to "provide relief to their customers — for example, through reduced premiums – safeguard their employees and engage with governments." He added that insurers are "promptly paying all legitimate claims where pandemic risk is covered."
But some groups do not believe that insurers have handled the pandemic appropriately.
The Financial Conduct Authority has taken insurers to court over the question of which policies cover COVID-19 losses. The FCA's test case on business interruption insurance sought a ruling on whether an estimated 370,000 companies should be able to claim on their policies for the period of the lockdown.
A judgment on Sept. 15 found largely in favor of policyholders. London-based insurer RSA Group PLC is appealing the decision in the Supreme Court.
Many insurers have introduced total exclusions in policies at renewal, denying any cover linked to COVID-19. The Bank of England's Anna Sweeney warned in September of a growing "protection gap" as a result, saying it was increasingly necessary to introduce some form of government backstop to encourage insurers to offer cover to businesses.
The U.K.'s insurance industry is working on establishing a pandemic reinsurer based on a model used by terrorism reinsurer Pool Re, which is funded by insurers but backed by government guarantees.
--Additional reporting by Martin Croucher. Editing by Ed Harris.
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