Imagine you run a business that has been hit by COVID-19. You find out that your policy excludes this type of business interruption. The thing that you’ve been paying for over many years has failed to protect you. Now you’re asking those questions in front of the lawyers taking up your class action lawsuit.
Regardless of whether they are entering legal proceedings, businesses across the UK are wrestling with these issues. Thing is, they aren’t asking how much they will get, or arguing the toss on a claim’s value. They are singularly concerned with one thing – survival.
COVID has changed the way we think about business insurance. This blog explores the impact these changes will will have those who buy and sell insurance for businesses. Our ambition is to learn from the shortcomings highlighted by recent events. If we do, we can confidently answer those tough questions with confidence. What is the point of business insurance? To help businesses survive.
The global coronavirus pandemic has had a significant impact on the insurance industry. The brokers, agencies and underwriters have mobilised to provide this essential financial service remotely. Motor lines have seen claims plummet, leading to premium refunds and policy rethinks. Business interruption clauses have led to uproar in the SME community and the looming threat of legal action.
ABI estimates for business interruption claims in the UK
the amount LV and Admiral recently put aside for motor insurance refunds
of insurance firms requiring all staff to work remotely
For many commentators, the insurance industry has long been ripe for disruption. COVID-19 is the catalyst that has put that opinion beyond doubt. As a commercial insurer, we are most interested in the ways in which insurance caters to businesses. We will concentrate on them, although the principles discussed will apply for many consumer insurance policies.
There is a lot of coverage of the impacts that Coronavirus has already had on businesses. The statistics paint a clear picture:
FloodFlash & cash: being a startup comes with some differences in business model. Many early stage tech companies are less concerned with profit and loss and more interested in evidence of growth for the business and the market. Coronavirus has brought traditional and tech businesses together. Now everyone has the same concern about the financial “runway” ahead of them.
There are other countertrends such as the remote-working boom, but the fundamental message is that cashflow is under pressure. That becomes clearer in light of the government measures to help UK businesses. Here are some examples:
All of these measures have one thing in common: they are all designed to help businesses manage their current cash situation. The best way for businesses to combat coronavirus impact is to make sure there is cash in the bank. In other words, in the age of coronavirus, cash is king.
“Cash is king” was adopted as a term following the 1987 stock market crash. It refers to the widely agreed wisdom that in times of crisis it is very important to have money readily available. The phrase equally applies to commercial and personal finances. The economic equivalent of “a bird in the hand is worth two in the bush”. When using this comparison in a crisis like coronavirus it only really works if the bush is on fire.
Insurance might seem like the obvious antidote for catastrophes that threaten cash availability. Why has it not come to the fore then? If anything, the industry has suffered as much damage as it has helped to mitigate. In a month after lockdown, the average insurer has lost 35% of its market capitalization (41% in Europe and North America). Lloyd’s of London expect Covid-19 will cost the industry $203bn (£166bn) in losses, equalling some of the most catastrophic hurricane seasons in recent memory. The legal and reputational fallout from business interruption claim issues will no doubt worsen the financial damage.
There is a more fundamental shortcoming with traditional insurance. This exists beyond failure to model pandemic risks or exclusions hidden in complicated documents or non-payment of claims. In fact, this issue exists even when claims get paid. It all goes back to cashflow.
Traditional insurance policies rely on the principle of indemnity. The idea that an insured party can recoup all of their costs after a catastrophic event. It can help determine whether you are worse off after a catastrophe, or whether you recover to where you were before the event. Having a healthy balance sheet full of debtors and healthy columns for future projections does not save a business in crisis though. Protecting cashflow through indemnity is a time intensive process (normally covered by the awful phrase “loss adjustment”).
Indemnity is one potential answer to “what is the point of commercial insurance?” This answer falls apart if you recoup your losses too late. Imagine getting the exact amount you need three months after receiving a large tax bill and having let your best staff go. In the imperfect world outside the balance sheet businesses can’t afford to wait and recover. When something goes wrong, they need cash quickly. They need to survive.
“I still feel as though there’s a catch, even though the money’s in the bank.”Andy Hodgson, owner of Automotive Electrical which flooded after Storm Ciara
If the answer to “what is the point of commercial insurance?” is survival, then financial decisions become simpler. Shepherding a business through a financial crisis or a global catastrophe requires cash. The traditional principles of indemnity don’t serve that need. Indemnity insurance still has a place in the market, but it must be augmented with insurance that can deliver cash fast. Insurance that guarantees survival.
There is good news though. The industry is reacting. New companies and techniques are emerging every week that are pushing the speed and transparency with which claims are paid.
The encouraging signs are appearing at ever different scale:
There are options out there for protecting your businesss cashflow. If you are looking for flood cover email email@example.com. Otherwise, the best place to start is with your broker.