Government or Public-Private Pandemic Risk Backstop Warranted: Best

Given the systemic nature of the COVID-19 pandemic, proposed public-private partnerships to provide a backstop addressing its effects are warranted, according to A.M. Best.

In a new commentary, "Retroactive Legislation, Social Inflation: Credit Negatives for Insurers," Best said that it expects significant reserve uncertainty to arise for the current accident year given the challenge insurers face to estimate ultimate losses resulting from the COVID-19 pandemic and the related shutdowns.

Social inflation, combined with lawsuits addressing liability policies, will drive defense containment costs significantly higher, the rating agency said. Meanwhile, court decisions will influence actual claims payouts, challenging insurers' ability to determine prudent reserve estimates and payout patterns.

In addition, legislative and policy measures are being considered in some states that would nullify business interruption coverage exclusions in commercial property policies, forcing insurers to compensate policyholders that were excluded during underwriting. Insurers with smaller capital bases would be particularly vulnerable to such measures, Best said.

"Any public-private partnership adopted to fill this protection gap should take into account the capital supporting all risks insurers bear, which is critical due to the uncertainty inherent in taking on those risks," Best said. "As insurers consider the level of capital they should hold, they factor in the demand that each risk poses, as well as assumptions about the level of diversification among these risks."

In addition, Best said, rating agencies and regulators require insurers to hold levels of capital commensurate with the risks on their books.

"Pandemic risk does not afford insurance companies any geographic diversification due to its global nature," Stefan Holzberger, A.M. Best chief rating officer, said in a statement. "Diversification by line of business also is not possible, as the current pandemic has demonstrated via the number of lines affected. Insurers may be able to offer limited protection against pandemic risks; however, these limits would be insufficient for a full recovery. Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses."

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