Insurers Struggle to Assess and Underwrite Pandemic-Related Risks in Commercial Policies

Introduction:

The COVID-19 pandemic has caused unprecedented disruption to businesses worldwide, leaving insurers facing significant challenges when it comes to assessing and underwriting pandemic-related risks in commercial insurance policies. As the pandemic evolved, it became evident that conventional insurance models were ill-prepared to deal with the scale and complexity of this global crisis. In this article, we delve into the difficulties insurers are encountering and explore potential solutions to address this ongoing issue.

The Emergence of Pandemic-Related Risks:
The outbreak of COVID-19 caught the insurance industry off guard, as pandemics were not typically considered within the realm of traditional commercial insurance risks. Unlike localized events, pandemics can rapidly spread across borders, impacting businesses on a global scale. The sudden surge in business interruptions, closures, and supply chain disruptions left insurers grappling with the magnitude of these unprecedented risks.

Lack of Historical Data:
Insurers heavily rely on historical data to assess risks and set premiums. However, pandemics are rare events, and there is limited historical data available to accurately predict their impact. This dearth of relevant information makes it challenging for insurers to quantify the potential losses and create comprehensive risk models.

Uncertainty and Volatility:
Pandemics are marked by uncertainty and rapid changes. As new variants of the virus emerge and governments respond with varying containment measures, the business landscape experiences constant fluctuations. Insurers find it difficult to assess risks and set premiums in such a volatile environment, leading to ambiguity for both insurers and insured businesses.

Business Interruption Coverage:
Business interruption insurance has become a critical concern for many commercial policyholders during the pandemic. While some policies include coverage for business interruptions caused by physical damage to the insured property, most do not explicitly cover pandemics. As a result, numerous legal battles have ensued between businesses and insurers over denied claims, further complicating the insurance industry’s response to the crisis.

Reinsurance Challenges:
Reinsurance plays a crucial role in helping insurance companies spread risks and manage large-scale claims. However, the pandemic’s widespread impact has strained the reinsurance industry as well. Reinsurers are now reevaluating their risk appetite and considering new exclusion clauses to limit their exposure to pandemic-related losses.

The Quest for New Solutions:
In the wake of the pandemic, insurers are exploring innovative approaches to better understand and underwrite pandemic-related risks. Some are turning to artificial intelligence and data analytics to assess risk exposures in real-time, enabling more informed decision-making. Others are collaborating with experts in epidemiology and public health to gain insights into future pandemic scenarios.