While insurance policies might not cover the mitigation or
cleanup costs related to commercial facility exposure to the coronavirus, preserving
a healthy and safe place of business remains a critical risk management issue.
As the coronavirus (COVID-19) continues to spread rapidly around
the world, it’s important to know what to do if someone carrying the highly
contagious virus comes in contact with any of your facilities or those of your
customers. Even the potential of your business premises being exposed to
COVID-19 can create a possible need to engage risk mitigation efforts.
Understanding the importance of utilizing a professional, credentialed
decontamination contractor both before and after facility exposure is crucial
to protecting your business.
Larry Thomas
“COVID-19 has presented new challenges for businesses around the
world, and it’s necessary to understand the importance of ensuring the safety
of all employees and customers,” said Larry Thomas, global president of
Crawford Specialty Solutions, a division of Crawford & Company that
includes Contractor Connection. Contractor Connection, an industry
leader in managed repair services, provides insurance carriers, brokers and
consumers a global network of more than 6,000 contractors vetted and managed
for performance in residential and commercial work, including specialists in
technical areas like cleanup after a biological event.
“Experts have warned that we have just begun to feel the impact of the
virus in the U.S., and it is expected to continue to affect lives for the
foreseeable future.”
With that in mind, it’s essential you ensure you are
utilizing a decontamination contractor who is rigorously vetted, held to the
highest standards, and professionally equipped to restore affected sites
through proper remediation and containment procedures. Here are some best
practices for how to approach this critical work while reducing risk for you
and your customers.
Prevention protects you, your customers and others
Prevention is the first step toward reducing exposure to the
virus. Even before an incident occurs, a decontamination contractor can work
with your business to provide cleaning and disinfecting services designed to
reduce the opportunity for infection and keep facilities operating longer. When
administered by a trusted, licensed and insured provider, preventative cleaning
provides a cleaner, safer work environment and enhances employee and customer
satisfaction.
Decontamination services limit business interruption
If you or your customers’ facilities are exposed to
coronavirus, legitimate decontamination services using proper techniques,
equipment and materials, and following CDC, state and local protocols should be
employed to restore your places of business back to operation as quickly as
possible, limiting business interruption. Time is critical, so you should
engage with a service that provides 24/7 assignment processing and emergency
response.
Lance Malcolm
“Providing access to a rapid-response decontamination
service can help reduce the potential impact of contamination in the workplace
and return the environment to full operational status as quickly as possible,”
said Lance Malcolm, U.S. president of Contractor Connection. “The focus must be
on helping companies limit business interruptions and ensure that the affected
facilities are completely safe for those who use them.”
Safe biohazard waste disposal reduces future risk of
exposure
As part of decontamination services, it’s also important to
utilize contractors trained to handle and properly dispose of biohazard waste,
safely removing any affected materials from the facility. Services that provide
quality assurance review and project monitoring ensure speedy completion and
provide peace of mind knowing exposure to the virus has been properly reduced
or eliminated.
The COVID-19 pandemic is unprecedented in many ways. The human toll is first and foremost on our
minds (as it should be), but as an insurance professional, I’ll stay in my lane
and address one of the economic impacts – business interruption.
Businesses Looking to Mitigate Losses
Among the ways in which we are in uncharted territory is the
scale of how businesses are impacted. Unsurprisingly,
in reaction to slow-downs and shut-downs in many business sectors, businesses
are looking for ways to mitigate their losses or recover lost revenue. One avenue that businesses are exploring is
the availability of business interruption coverage under their property
insurance policies. Other potential
claims include communicable disease coverage found in some policies purchased
by hotels or event cancellation insurance, but those claims are beyond the
scope of this article.
Property insurance was designed originally to cover fire losses
and similar losses of physical property following the Great
London Fire of 1666. Of course,
property policies have evolved since then to cover additional risks including,
in many instances, business interruption losses caused by physical damage to property. A property policy may, for example, pay to
repair the damage caused by a fire and may cover the loss of business during
the reconstruction period. But here’s
the rub. Are the business interruptions related
to COVID-19 caused by physical damage to property?
Policy Language Will Control
The language of an insured’s policy will control whether
COVID-19 interruptions are covered. Unfortunately,
much of the media commentary on business interruption claims related to
COVID-19 has inappropriately treated all insurance policies as though they are identical. Policyholders have a wide array of different
policies they can purchase. For example,
some policyholders have purchased an ISO Businessowners Policy (BOP) with
standard terms and exclusions, others have purchased all-risk policies, and
others have purchased a variation of these types.
This commentary does not try to provide sweeping
pronouncements or give the impression that a single outcome will apply equally
to all situations. Instead, the
following is a starting point for a more detailed analysis under individual
circumstances. Details matter and the
analysis for a particular claim must start with the policy terms and facts
specific to that policyholder.
Is Coverage Triggered?
There have already been a handful of lawsuits filed related
to business interruption claims, some of which suits were filed before the
insurers even denied a claim. For
example, the Oceana suit filed by a restaurant in NOLA
and a suit filed by chef Thomas
Keller, owner of The French Laundry in California. Also, a group of tribal
nations that own casinos filed a lawsuit in Oklahoma and the owner of a
restaurant/movie chain filed suit in Illinois. Policyholders in these lawsuits are seeking a
ruling that they are entitled to coverage for losses sustained during their current
shutdowns. A review of the policies at
issues underscores the point made above – the outcomes in these suits and others
may not all be the same because different policies are at issue.
Nonetheless, there are some overall issues to consider. While the scope of business shutdowns is
unprecedented, we do have similar experiences as a guide, albeit on a smaller
scale, that may indicate how the current COVID-19 business interruption claims
may play out.
The threshold issue will be whether the insureds can prove
that their business losses are caused by “physical damage to property,” which
is the standard language in many business interruption policies. While the concept of causation focuses on
assigning blame for an accident in some legal contexts, it is important to
realize that in the insurance context the issue of causation is different.
In insurance, the concept of causation addresses whether
a particular loss triggers coverage, not who is responsible for causing the
loss. In this regard, we can replace
the word “causation” with “trigger.” So,
the question with the COVID-19 losses becomes, can these policyholders prove
that their business interruption losses were triggered by physical damage to
property akin to the fire loss damage mentioned above?
Past Experience
A series of cases from Minnesota demonstrates how the
COVID-19 business interruption claims might be resolved.
Where there is direct physical loss to property, such as
contaminated oats that could not be sold or a building rendered useless because
of asbestos contamination, the courts have found that business interruption coverage
was triggered. That is, these losses fit
the definition of direct physical loss to property. General Mills, Inc. v. Gold Medal Ins. Co.,
622 N.W. 2d 147 (Minn. Ct. App. 2001); Sentinel Mgmt. Co. v. New Hampshire Ins.
Co., 563 N.W. 2d 296, 300 (Minn. Ct. App. 1997).
But, where an earthquake caused a power loss in two
Taiwanese factories, and as a result, those factories could not supply products
to the Minnesota insured, the court found that the outages caused no injury to
the Taiwanese factories other than a shutdown of manufacturing operations, and
that this did not constitute “direct physical loss or damage.” Pentair, Inc. v. Am. Guar. & Liab. Ins.
Co., 400. F.3d 613 (8th Cir. 2005).
More recently, a federal appellate court considered a claim
related to mad cow disease. Source Food was
a company that sold products containing beef tallow. The USDA prohibited the importation of the
tallow from Canada in 2003 after a cow in Canada tested positive for mad cow
disease. The border was closed to Source Food’s sole supplier of beef product
in Canada. There was no evidence that the beef product specifically destined
for Source Foods was contaminated by mad cow disease, but after the border was
closed to the importation of beef products, Source Food was unable to fill
orders and lost business as a result. Source
Food submitted a business interruption claim.
It argued that the closing of the border caused direct physical loss to
its beef product because the beef product was treated as though it were
physically contaminated by mad cow disease and lost its function. But, the court held that to characterize
Source Food’s inability to transport its truckload of beef product across the
border and sell the beef product in the United States as direct physical loss
to property would render the word “physical” meaningless. Additionally, the
policy’s use of the word “to” in the term “direct physical loss to
property” was significant. The court explained
that the policy did not cover loss “of” property, it covered loss “to”
property. As a result, the cause of Source
Food’s business interruption was the government shutdown of the border, not
direct physical loss to its property. Source
Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006).
What About the Current Claims?
Here, are the business interruptions related to COVID-19 the
direct result of the government restrictions on businesses or are they due to
the physical loss to their property?
Under the reasoning of the Source Food case, much of the current
business interruption claims would seem not to trigger the standard business
interruption coverage in a commercial business interruption policy or BOP. As cautioned above, this is not a universal
outcome under all policies. For example,
an all-risk policy would generally not distinguish between business
interruption losses due to government action or direct physical loss because
all-risk policies cover all losses except those specifically excluded. While it is possible that an all-risk policy
could specifically exclude losses due to civil authority orders, that is not a
standard exclusion in all-risk policies.
With regard to business interruption policy exclusions,
there are exclusions to consider even if a policyholder can meet its burden to
trigger coverage under the standard business interruption policy. For example, some policies have an exclusion
that precludes coverage for losses that result from mold, fungi or bacteria. However, because COVID-19 is a virus, that
exclusion may not apply. But, other
policies have exclusions for viruses, diseases or pandemics. That type of exclusion appears problematic
for policyholders, even those who satisfy the initial question of
causation/trigger.
The result may not be all-or-nothing. Might claims be partially covered? It is possible. For example, if a restaurant were shut down
because it had been contaminated by COVID-19 and needed to be cleaned and closed
for a two-week period to ensure no lingering virus remained, that period of
shutdown might be considered direct loss to property even though the shut-down
period after the cleaning period was not covered because the following shutdown
period was attributable to a government order.
Likewise, there may be a different analysis applied to some business
interruption claims that result from supply chain impacts. However, claims related to supply chain
disruptions are beyond the scope of this article.
Legislation and Duties of Insureds
It is notable that legislators in several states recently
proposed bills that would retroactively void the exclusions that would apply to
COVID-19 business interruption claims. Although
well-intentioned, these bills are deeply troubling because, among other things,
they could severely impact the financial stability of the insurance market,
which took in premiums based on such claims being excluded. And, because the legislation would not help
the 60 percent of businesses that do not purchase business interruption
coverage, the risk of crippling the insurance market is even more questionable.
Moreover, these bills would address only
the exclusions and do nothing to impact the initial question of whether
policyholders can trigger coverage.
Nevertheless, if a policyholder believes it may have a claim under its insurance policy(ies), it should provide prompt notice to its insurer(s) so that it does not risk a denial based on late notice. Likewise, once the claim has been made, it is essential that the insured cooperate with the insurer, including providing timely proof of loss.
Michael Menapace
Michael Menapace is a Triple-I Non-Resident Scholar, a partner at Wiggin and Dana LLP, and a professor of Insurance Law at the Quinnipiac University School of Law.
The Financial Times reports that
U.S. lawmakers and lawyers are considering efforts to force insurance companies
to pay claims related to the coronavirus pandemic. Congress also is debating
the need for legislation to require insurers to cover costs from business
interruption caused by the pandemic. U.S. insurers contend that their business
interruption policies exclude coverage for pandemics and that making such
coverage retroactive would cause the industry to collapse. Joseph Wayland,
general counsel for the U.S. insurer Chubb, said the losses would overwhelm
insurers’ ability to pay and that forcing these companies to take
responsibility for risks they never underwrote nor charged for represented an
existential threat. Bruce Carnegie-Brown, chair of Lloyd’s of London, agreed
that such a revision to insurance contracts would jeopardize the industry.
A Wall Street Journal editorial argues
that forcing costs of the economic disruption caused by the coronavirus
pandemic upon insurers would cause long-term economic damage unless a federal
backstop is put in place. The editorial says if business interruption insurance
“can be stretched and exclusions nullified during a crisis” insurers will conclude
that such coverage is not worth the risk and will drop the product.
Triple-I: Insurers are engaged in COVID-19 crisis
A Triple-I Fact Sheet, Insurers Are Engaged In the COVID-19 Crisis,
outlines how the industry’s financial stability allows insurers to keep the
promises made to policyholders in the event of tornadoes, hurricanes, or
wildfires. It also notes how insurers are contributing to COVID-19 related
charities, such as food banks and medical supplies.
“Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk,” said Sean Kevelighan, Triple-I CEO. “Pandemic-caused losses are excluded from standard business interruptionpolicies because they impact all businesses, all at the same time.”
APCIA on how insurers are helping customers
David A. Sampson,
president and CEO of the American Property Casualty Insurance Association
(APCIA), described in a statement how property/casualty insurers are working “to
proactively help consumers in this time of crisis.”
Examples include
temporary arrangements for:
Flexible payment solutions for families,
individuals, and businesses;
Suspending premium billing for small-business
insureds, such as restaurants and bars;
Waiving premium late fees;
Pausing cancellation of coverage for personal and
commercial lines due to non-payment and policy expiration;
Wage replacement benefits for first responders and
medical personnel who are quarantined;
Suspending personal auto exclusions for restaurant
employees who are transitioning to meal delivery services using their personal
auto policy as coverage;
Adding more online account and claims services for
policyholders;
Shifting more resources to anti-fraud and cyber
security units, in recognition that bad actors prey on victims during times of crisis; and
Suspending in-person loss control visits and
inspections.
On the subject of exclusions
for contagious diseases in business interruption policies, the statement said:
“If policymakers force insurers to pay for
losses that are not covered under existing insurance policies, the stability of
the sector could be impacted, and that could affect the ability of consumers to
address everyday risks that are covered by the property casualty industry.”
It went on to say:
“APCIA’s preliminary estimate is that business
continuity losses just for small businesses with 100 or fewer employees could
fall between $220-383 billion per month. The total surplus for all of the U.S. home,
auto, and business insurers combined to pay all future losses is roughly only
$800 billion, with the combined capital of the top business insurance
underwriters representing only a fraction of that amount.”
Business Insurance reports
that, according to sources inside the federal government, progress is being
made on legislation that would provide a federal backstop for pandemic risk
insurance and that a related bill could be introduced within the next 30 days.
According to the sources, the bill would set up a pandemic risk insurance
program that would be similar to the federal terrorism insurance program. They
also report that Rep. Maxine Waters (D-Calif.), chair of the House Financial
Services Committee, is circulating a draft bill including the proposal.
The Insurance Information Institute invited its members to a webinar titled “Covid-19’s Impact on Health, the Economy and Growth” on March 5 at 11:00 a.m. EST presented by Triple-I Vice President and Senior Economist Michel Léonard, PhD, CBE.
Dr. Lèonard will discuss the following key points:
• Economic impact likely to continue into Q3/Q4 2020 and 2021 • Could reduce global growth by as much as 1 percent and delay recovery by up to 12 months • Fiscal and monetary policy, rates cuts, unlikely to be effective • Insurance industry to see higher claims, reduced premium growth
He will also preview the Global Macro and Industry Outlook report before it is made available to the public.
To find out more about the benefits of Triple-I membership click here.
COVID-19, the new coronavirus, has killed more than three
times as many people as the 2003 SARS epidemic.
The World Health Organization (WHO) reported that, as of 10
a.m. Central European Time (CET) on March 1, there were 87,137 confirmed
COVID-19 cases and 2,977 of the infected people had died. From November 2002
through July 2003, according to the U.S. Centers for Disease Control and
Prevention (CDC), 8,098 people worldwide became sick with severe acute
respiratory syndrome (SARS) and 774 died.
More people are believed to have been infected with COVID-19
than official statistics show. This is because confirmed infections are based
on positive tests for the virus, and some countries—including the United
States—have been doing very little testing. Further, the estimated 2 percent
death rate attributed to the disease is based on this unreliable infection
count.
Instead of SARS, some are now comparing COVID-19 with the Ebola pandemic of
2014 to 2016. Ebola is believed to have
killed about 50 percent of those it infected, but that outbreak was contained
before it reached the same number of infections as COVID-19.
So, is there a useful historic comparison
to be made with COVID-19? I would argue that there is: the “Spanish Flu” of
1918-19.
Policemen in Seattle during the influenza epidemic. December 1918. National Archives.
There is no vaccine for COVID-19, and
experts suggest it could take a year or
more to develop, test, manufacture, and distribute a vaccine. This suggests
there are few medical strategies for dealing with the current outbreak. It’s as
though we’re medically in the world of 100 years ago.
The 1918 flu virus had an estimated
mortality rate of about 2 percent and was very infectious. It is estimated that
as many as one-third of the entire world population was infected at some time,
so even a 2 percent mortality rate caused millions of deaths.
This raises a scary thought about how
the COVID-19 pandemic might play out: the Spanish Flu swept around the globe in
three phases. The first was in the
Spring of 1918 and, although it infected widely, had a relatively low mortality
rate. The second phase occurred in the Fall of 1918. This phase saw faster
infection spread and was much more deadly. The third phase was in February and
March of 1919 and was less infectious and less deadly than either of the two
prior phases.
World War I – with large concentrations
of soldiers in barracks and trenches and truck convoys moving across Europe –
may have contributed to this infectious arc. But the virus killed more people
than the war on every continent except Europe.
Insurance
industry impact
What would a COVID-19 pandemic mean
for insurers? The main impact would likely be on health insurers, since the
number of people seeking hospitalization would likely spike claims far beyond
anything their rate structures have anticipated. In 1918 hospitals were so overwhelmed
that auditoriums, indoor sports arenas, and similar spaces were set up to house
patients. Scarcity rates would apply; for example, the number of respirators
available currently is far short of what would be needed, and prices for new
supply would likely surge.
As I’ve written previously, for life insurers the effect of a severe pandemic would depend on
which segments of the population are likely to die. In 1918, in addition to the
very old, that virus struck unusually strongly at people in the prime working
years, triggering benefits from both individual and group life insurance. The
sudden impact of such unpredicted losses would affect all life insurers,
particularly the weaker ones.
In the property and casualty sector, the
line most directly affected is likely to be workers compensation, particularly
for health care workers and others exposed to the virus as a result of their
work—such as police, fire, and EMT. Another possible line affected is various
liability lines, involving claims from people who became sick from
manufacturing, dispensing, or receiving a vaccine or other treatments. In
recent years, Congress passed laws blocking such liability claims, but it’s not
clear that it will do so again today.
Beyond the direct effects to
insurance, there are growing forecasts that the global economy, and especially
particular sectors, could see dramatic cutbacks. Businesses and other
organizations that involve people gathering in crowds are already seeing such
effects, and insurance premiums that reflect these downturns are likely to
follow. However, claims are also likely to turn down (e.g., fewer auto
accidents), so the effect on those lines might actually be neutral or positive.
Learn from history
Today people and goods move around the
world with unprecedented speed. Urban environments and the transit systems that
serve them are as packed with people as any military convoy or trench network.
If COVID-19 follows a similar track to
that of the Spanish Flu, the current outbreak would turn out to have been a
mild phase. If this scenario is correct, the first phase would taper off in a
month or two, followed by several months in which the virus would appear to
have ended its threat.
We should continue developing vaccines
and other preventive/mitigating measures during this lull to better prepare for
the more virulent phase that might manifest in the second half of 2020. Failure
to do so would mean we’ve learned nothing from the worst global pandemic in the
last 100 years.
Cyber is a relatively new, evolving risk. Insurers manage their exposures, in part, by setting coverage limits and excluding events they don’t want to insure.
On December 20, 2019, President Trump signed a federal funding package that includes a seven-year extension of the Terrorism Risk Insurance Act (TRIA). TRIA provides for a federal loss-sharing program for certain insured losses resulting from a certified act of terrorism.
Passage of the act was met with resounding approval by the insurance industry. You can read more about it here.
A critical mandate of the TRIA extension is for the Government Accountability Office (GAO) to make recommendations to Congress about how to amend the statute to address emerging cyberthreats. Triple-I recently hosted an exclusive members-only webinar featuring Jason Schupp of the Centers for Better Insurance, who discussed issues likely to be addressed by the GAO report.
Schupp said the report will likely serve as a starting point for a discussion about cyber threats and how the insurance industry can better meet the needs of businesses, nonprofits and local governments for cyber insurance. It will address:
Vulnerabilities and potential costs of cyber-attacks to the United States;
Whether adequate coverage is available for cyber terrorism;
Whether cyber terrorism coverage can be adequately priced by the private market;
Whether TRIA’s current structure is appropriate for cyber terrorism events; and
Recommendations on how Congress could amend TRIA to meet the next generation of cyber threats.
Cyber terrorism is already covered under TRIA, but such acts don’t fit neatly into the TRIA framework. Because cyber limits and conditions are already narrow, TRIA’s current make available requirement has not been effective in providing coverage for cyber-terrorism events at the same limits and conditions as non-cyber events.
Schupp proposes that the requirement be amended so the coverage doesn’t exclude insured losses specific to the loss of use, corruption or destruction of electronic data or the unauthorized disclosure of or access to nonpublic information.
But expanding the requirement carries considerable risk. If insurers are required to make more coverage available for cyber events than they are comfortable with the result could be a pullback in property and liability insurance generally – not just for cyber events. Any expansion must be balanced with the terms of the backstop.
Schupp concluded that the GAO’s investigation and report (which is required to be completed by June 2020) is likely to kick off a multi-year debate that could substantially redefine U.S. cyber insurance markets. Insurers, policyholders and other stakeholders should engage accordingly.
To learn about how to become a member of Triple-I visit iiimembership.org.
The average ransomware payment increased by a whopping 104 percent in the fourth quarter of 2019, spiking to $84,116 from $41,198 in Q3, according to a report from Coveware, a security vendor.
Ransomware, also known as cyber extortion, involves the use of malicious software designed to block access to a computer system until a sum of money is paid. The 4Q increase reflects the diversity of the cyber criminals attacking companies.
Some ransomware variants are focusing on large companies where they can attempt to extort the organizations for seven-figure payouts. Small businesses, on the other hand, are bombarded with ransomware variants with demands as low as $1,500.
The total cost of a ransomware attack depends on its severity and duration and includes the costs of the ransom payment (if one is made), as well as remediation costs, lost revenue, and potential brand damage.
In Q4, ransomware actors also began exfiltrating data from victims and threatening to release it. In addition to remediation and containment costs, this complication adds to the potential costs of third-party claims.
Other key takeaways from the report include:
98 percent of companies that paid the ransom received a working decryption tool in Q4 2019, unchanged from Q3.
Victims who paid for a decryptor successfully decrypted 97 percent of their data, a slight increase from Q3.
Average downtime increased to 16.2 days, from 12.1 days in Q3 of 2019. The was driven by a higher prevalence of attacks against larger enterprises, which often spend weeks fixing their systems.
Cyber criminals demand Bitcoin almost exclusively now in all forms of cyber extortion because it’s easier to swap extortion proceeds into a privacy coin after they collect, than to require a victim to purchase a less liquid type of digital currency.
Less sophisticated and well-financed attackers will target small companies with small IT budgets.
Public sector organizations continued to account for a high percentage of ransomware attacks in Q4. The attacks are expected to continue until these organizations are able to increase their security budgets.
On Tuesday, December 17, the House approved a package of bills that includes a seven-year reauthorization of the Terrorism Risk Insurance Act (TRIA) and funding for the National Flood Insurance Program until September 30, 2020.
Numerous insurance industry groups applauded the extension of TRIA. The act has been an important support in the effort to supply terrorism insurance through the private market. Since it was enacted, the percentage of companies purchasing terrorism insurance has risen to 80 percent, and the price of coverage has fallen more than 80 percent.
The $1.4 trillion spending package also includes:
Federal funding ($25 million) for gun violence research for the first time in 20 years.
A repeal of Obamacare taxes, including a 2.3 percent excise tax on medical devices, a health insurance industry fee that would have taken effect in 2020, and the 40 percent “Cadillac” excise tax on the most expensive health-insurance plans.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which features provisions that make it easier for smaller employers to join open multiple-employer plans, ease non-discrimination rules for frozen defined benefit plans, and add a safe harbor for selecting lifetime income providers in defined contribution plans.
The bill is expected to pass the Senate and be signed by President Trump before government funding expires on December 20.
By Loretta Worters, Vice President – Media Relations
The credit crisis of 2007-2008 was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared. “Everyone was impacted, not just those working in banks. Because the price of debt, the ability to get financing changed, a lot of things happened. So, everyone is impacted by credit every day, whether they know it or not,” said Tamika Tyson, senior manager, credit with Noble Energy, in this video interview.
Tyson, who is also a non-resident scholar with the Insurance Information Institute, said what she is most concerned about is debt repayments that are coming due. “If a global recession happens, as economists are predicting, and it happens in conjunction within an election, it can be difficult for companies to refinance any mature debentures they have coming in 2020,” she said. “Leadership needs to be thinking about the risks in their company. Not just the credit risks, but all risks related to their business.”
What leads to credit risk and how can companies protect themselves?
The main microeconomic factors that lead to credit risk include limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank.
Doing a comprehensive risk assessment is a great idea for everyone within an organization, noted Tyson. “Once an assessment is made as to how much risk they are exposed to, then they can develop a strategy to help protect the company. If there’s more risk in the system than a company is willing to take, then they should consider obtaining credit risk insurance,” she said.
What is Credit Risk Insurance?
Credit risk insurance is a tool to support lending and portfolio management. It protects a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer becoming insolvent or failing to pay within the agreed terms and conditions.
What can impact credit risk?
The factors that affect credit risk range from borrower-specific criteria, such as debt ratios, to market-wide considerations such as economic growth. Political upheaval in a country can have an impact, too.
For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability.
“At the end of the day, political risks have the ability to impact credit risks. Credit risks rarely impact political risks,” she said. “We have a lot of different views right now on the political spectrum so until we know how that’s going to work out, it’s going to create risk in the system, and we’ll see how different companies react to that,” Tyson said.
“We all talk about biases. Everyone thinks they’re better off and it’s always someone else that has the issue. It’s the same when looking at a risk assessment or reviewing someone’s financials; everyone thinks they’re doing fine, but then they discount what’s going on with other people. That’s why it is imperative companies self-evaluate as they evaluate those they transact business with.”
“Know your portfolio, know your customers and understand your risk tolerance,” said Tyson. “Know, too, there are a lot of tools available to help you mitigate against those risks.”
Private workers compensation insurers were slightly less profitable in 2019 than their 2018 record, according to a preliminary analysis by the National Council of Compensation Insurance (NCCI). NCCI estimates the combined ratio – a measure of insurer profitability – for 2019 will be about 87 percent, the second-lowest in recent history after last year’s record-low 83.2 percent.
These results, reflecting the segment’s sixth consecutive year of underwriting profitability, are part of NCCI’s State of the Line Report—a comprehensive account of workers’ compensation financial results.
Workers’ compensation net premiums written (NPW) fell 3.9 percent in 2019, to $41.6 billion from $43.3 billion in 2018, the report says. Before 2018, cession of premiums to offshore reinsurers stalled NPW growth. But the Base Erosion Anti-Abuse Tax (BEAT) component of the Tax Cuts and Jobs Act of 2017 – which limits multinational corporations’ ability to shift profits from the United States by making tax-deductible payments to affiliates in low-tax countries – spurred NPW growth to almost 9 percent in 2018.
While the BEAT’s residual effect and the strong economy may place upward pressure on 2019 net premiums written, recent decreases in rates and loss costs are likely to more than offset these factors.
Changes in rates/loss costs impact premium growth and reflect several factors that impact system costs, such as changes in the economy, cost containment initiatives, and reforms. NCCI expects premium in 2019 to fall 10 percent, on average, as a result of rate/loss cost filings made in jurisdictions for which NCCI provides ratemaking services.
The State of the Line Report was presented at NCCI’s Annual Issues Symposium (AIS) in May.
