Rating agency AM Best in its new analysis suggests that industry capital backing reinsurers writing business interruption insurance could decline by as much as 50% if legislated policy changes force carriers to pay for two months of retroactive coverage on COVID-19-related claims.
AM Best believes forcing insurers to pay for COVID-19-related business interruption claims, despite any specific policy exclusions, could threaten many insurers’ solvency and reap “disastrous consequences” for the U.S. property/casualty insurance industry.
The ratings agency’s latest report estimates that around $633 billion of US reinsurance companies’ surplus is exposed to BI losses and the impact of legislation would lead to estimated monthly BI losses of $150-$200 billion for businesses with fewer than 100 employees.
As a result, a closure of two months would result in a projected after-tax capital and surplus loss of 37-50%.
AM Best’s total BI exposure estimate is based on the combined surplus of commercial lines insurers and reinsurers that have exposure to commercial multiperil or property lines, and personal lines insurers that also underwrite commercial multiperil exposures.
Furthermore, a significant number of companies would see their Best’s Capital Adequacy Ratio (BCAR) transition downward under expanded BI coverage.
While BCAR assessments are not the sole determinant of an insurer’s balance sheet strength, one of the building blocks of AM Best’s rating process, a significant deterioration in the BCAR assessment could lead to the downgrade of an insurer’s credit ratings.
Based on AM Best’s analysis, many insurers could experience rating downgrades of multiple notches.
“Legislation forcing insurers to pay for unintended business interruption losses would have a destructive impact on the industry’s financial strength and affect its ability to fulfill policyholders’ interests,” said Stefan Holzberger, chief rating officer at AM Best Rating Services.
“In the long term, retroactive coverage could affect pricing, availability of insurance and confidence in underwriting.”
Many of the bills being considered include wording that allows insurers to seek reimbursement from a state’s department of insurance, but any reimbursement would ultimately come back from the industry in the form of assessments based on market share.
AM Best believes Insurers likely would pass these assessments on to their policyholders.
The insurers most at risk, according to the commentary, would be those that specialize and have concentrations in small to midsize business insurance.