The National Association of Insurance Commissioners (NAIC) issued a COVID-19 business interruption data call on behalf of all state departments of insurance except New York and New Mexico. Consistent with its tendency to opt-out of NAIC initiatives, the New York Department of Financial Services (DFS) issued its own data call. It is not clear why New Mexico decided not to participate.
While there are no doubt limitations in the data collected by the NAIC, a few important insights are readily apparent.
COVID-19 Business Income Claims — Unusual in Nature but not in Scale
Through the end of October, insurance companies have received 201,000 claims for business income losses associated with the COVID-19 pandemic which represents about 2.6% of all policyholders with business income coverage. Of those claims:
- 1.5% have been closed with a payment;
- 82% have been closed without payment (i.e., denied or withdrawn); and
- The remaining 17% await disposition.
Less than 1% of claims closed without payment have so far led to the filing of a lawsuit.
To put these claims into perspective, Hurricane Katrina resulted in more than 1 million homeowners insurance claims. Within a year, 95% had resolved. Less than 2% went into litigation or mediation according to the Insurance Information Institute (Aug. 22, 2006).
Florida’s experience with Hurricane Irma (2017) claims highlights what is unusual about COVID-19 business interruption claims. As a result of the hurricane, Florida insurers received 3500 business interruption claims (representing only about 5% of commercial claims). During COVID-19, business income claims represent what appears to be nearly 100% of commercial claims. Further, only 45% of Hurricane Irma business income claims closed without payment compared to 82% for COVID-19.
Comparison to Paycheck Protection Program — A Fraction of Overall Size but Individual Payments on Par
The Paycheck Protection Program (PPP) distributed $525 billion reaching 5.2 million small businesses. In comparison, insurance companies have made $296 million in final claims payments to 3000 business (about 0.06% of the scale of PPP). Insurer have made partial claim payments and set reserves for future expected payments on open claims of an additional $1.3 billion (bringing total business insurance payouts to 0.31% of the scale of PPP).
Interestingly, the average closed claim payment under business income insurance and the average PPP loan are about the same ($99,000 and $101,000, respectively). This may suggest an “average” business need to cover $100,000 of continuing expense at least to weather a 2-month lockdown.
Prevalence of Virus Exclusions — Most but Not All
4 out of 5 policies with business income coverages contain a virus exclusion. Small businesses are more likely to have a policy with a virus exclusion (83%) than a large business (78%). As a point of comparison, only 1 in 5 policies has a terrorism exclusion.
Physical Damage Requirement — Small Businesses Get the Short End of the Stick
In perhaps the most surprising result from the data call, business income coverage sold to 15% of large businesses does not require a physical loss to trigger coverage (which drops to 2% for small businesses).
As CBI has been pointing out, large businesses are far more likely to access business income coverage without having to show physical damage under the proposed Pandemic Risk Insurance Act — leaving small businesses with no greater prospect of being paid during the next pandemic than they have today. The NAIC data call shows that the separation of the haves and have nots has already begun.