Nightview of Vittorio Emanuele II gallery and the cathedral in Piazza Duomo, Milan, Italy

In brief

What people are learning at an ever-increasing pace is that besides the thousands of victims by COVID-19, the financial consequences of this pandemic will have a dramatic impact on the survival of many businesses.


Because of the forced closure of their premises pursuant to Governments’ orders, companies whether big, medium-sized or small will incur or have already incurred severe financial losses, which can put at risk their very same existence.

In this scenario, many companies are unlikely to have a proper insurance coverage in place to shield from pandemic events. The majority of businesses may have a property damage or business interruption insurance in place but neither of them would probably result in an appropriate and effective coverage in these unprecedented circumstances.

The main question in fact is whether COVID-19 qualifies as an “insured event” under the relevant insurance policy in place. Although this ought to be assessed on a case-by-case basis, the answer is likely to be negative.

Business interruption insurance protects businesses against a loss of income during periods when they cannot operate as usual due to the occurrence of an insured event (e.g., fire, flood, hurricane, etc.). However the majority of business interruption (and property damage) policies require business interruption to be a consequence of a physical damage to property, which may not occur in the context of COVID-19 events. In the current circumstances, business interruption was mainly triggered by the closure of the business premises (either on a voluntary or compulsory basis) due to the pandemic outbreak, rather than by an insured event which caused damage to property (e.g., machinery and other assets for business production). In addition, even if some business interruption policies bear extended cover to epidemic events, they may well exclude pandemics from their insured events’ list (or COVID-19 from the list of “notifiable diseases”).

The immediate consequence is that failing appropriate insurance coverage, companies will retain huge financial losses, putting at risk their business continuity and potentially leading sometimes to insolvency or bankruptcy.

What could be or should have been an appropriate insurance coverage in the circumstances?

Taking into account that conventional business interruption insurance would unlikely fit for the purpose a viable option should necessarily part from conventional models. In this respect, some major insurers and reinsurers following the outbreak of other pandemics in the last decade (such as Sars, Mers, Zika) implemented non-damage business interruption (NDBI) insurance.

NDBI insurance can offer protection against loss of profits and other financial implications (e.g. restoration costs) triggered by business interruption caused by the occurrence of and insured event, irrespective of any damage to property and/or business assets.  Despite there is no one-size fits all solution, NDBI policies may address the coverage gap left by traditional business interruption policies and in fact can help both against pandemics as well as against other business interruption originators such as regulatory risks, cyber-attacks, electricity blackouts, strikes, government action, which are usually unrelated from any damage to property.

It is obviously too late now to purchase an NDBI against Covid-19, given that the “insured event” (i.e., the pandemic) already occurred.

Still, as of today, the offering of NDBI policies is not widely spread in the market and few companies will probably have such a coverage in place. The current pandemic will certainly raise clients’ consciousness on the need to purchase proper NDBI insurance and will likely boost relevant insurers’ offering.

NDBI policies are necessarily more customised than other insurance products are and require a more rigorous risk assessment. Despite other catastrophic events (e.g., hurricanes, flooding, fires or earthquakes) which are usually limited to a certain area, pandemic events trigger an accumulation risk for insurers not only because of multi-country spreading of the disease, but also because of the massive losses that such events can generate in a very short time frame.

Actually, pandemics generate losses with a multiplied-factor effect striking not only companies, but also their entire supply chain, which makes it very difficult for both insurers and insured to determine the magnitude of risk exposure.  Besides, from the insurers’ perspective, risk exposure can be huge given that companies who are affected almost all at the same time, will file their claims almost simultaneously, thus impairing the principle of risk diversification .

All the above factors inevitably have an impact on the coverage costs (i.e., premiums), the amount of insured risks and, last but not least, on the ability of the insurance market to cope with pandemic risks claims.  In this respect, Mr Huw Evans, Director General of the Association of British Insurers recently stressed the need for governments and the insurance industry to cooperate to protect the world against future pandemic risks. This because, he noted, “providing widespread insurance cover against pandemics would be virtually impossible without state support because the amount of capital insurers would have to hold against the risk would result in completely unaffordable prices for customers.”

It is yet to be seen how companies and insurers will deal in the future with epidemic/pandemic risk coverage, but Governments must play an active role in supporting the insurance market.

So-called Protection Gap Entities, established to deal with some catastrophic events (hurricanes, flooding and earthquakes), can be a valuable example of joint efforts between governments and insurers to seek to provide insurance protection for risks that would otherwise be uninsurable.  Initiatives such as Pool Re, TRIA, Caribbean Catastrophe Risk Insurance Facility, California Earthquake Authority and others are viable examples of partnered solutions with governments as well as of a state-backed response to the largest incidents although focussed on low frequency, high magnitude events with relatively narrow geographic (and as such diversifiable) impacts.

It is a fact that the insurance market alone does not have sufficient capacity to respond to pandemics. Hence, it is time for governments to respond to a global call of protection of their citizens against the increased risk of pandemic and catastrophic events as a whole, stemming in some cases from global climate change. Time is of the essence since the world is facing risks capable not only of threatening the lives of millions of people, but also of generating worldwide economic crisis with unprecedented adverse effects.