In part 3 of our blog series on reinsurance issues arising from COVID-19, we consider the implications of “reopening” the economy on reinsurance exposure.
Recent events demonstrate that the process of reopening the economy will continue to be burdened by surges in COVID-19 cases. This increases the likelihood that governments and businesses will face potential liability for employees and patrons who contract COVID-19 on the premises. We can anticipate that this will impact reinsurance exposure in several ways:
First, employers likely will see a surge in workers’ compensation cases involving COVID-19. Workers’ compensation coverage generally insures bodily injury to a worker “by reason of [his/her] employment, and in the discharge of [his/her] duty to [his/her] employer.” Roberts v. J.F. Newcomb & Co., 201 A.D.759 (3d Dep’t 1922), aff’d, 234 N.Y.553 (1922). Jurisdictions vary on whether infectious disease claims are compensable under workers’ compensation laws. Some US state statutes exclude “ordinary diseases of life” from workers’ compensation coverage. However, a number of jurisdictions have enacted laws to expand workers’ compensation coverage to include COVID-19 claims in response to the pandemic, particularly for essential workers. As more jurisdictions pass laws expanding coverage and claims increase with reopening, these exposures are likely to shift liability to insurers and their reinsurers. Further, given reports of the lasting effects that COVID-19 can have on the body – and the fact that COVID-19 can exacerbate other conditions like asbestos exposure – insurers and reinsurers may continue to face liability for long tail workers’ compensation claims for years to come.
Second, government initiatives to expand business interruption coverage may create additional liability for the reinsurance industry. The availability of business interruption coverage for losses due to COVID-19 is a hotly contested issue in both the US and the UK. To facilitate the reopening of the economy, many jurisdictions are considering legislation to definitively expand coverage to COVID-19 losses. Given these initiatives and the substantial losses faced by businesses across the globe, the reinsurance industry is likely to bear a significant amount of exposure for COVID-19 losses.
Third, irrespective of whether the reinsurance industry itself must cover COVID-19-related losses, these exposures may create new administrative costs for reinsurers. To mitigate the impact of uninsured COVID-19 losses, lobby groups and legislators have proposed government-funded recovery programs that would compensate losses that are not actually covered by a business’ insurance policies and which exceed certain monetary thresholds. Some of these proposals call upon insurers and reinsurers to administer these claims, even if the recoveries themselves are government-funded. Again, given the potential long-tail nature of COVID-19 claims, reinsurers handling these claims may face these administrative costs and burdens for many years.
Just as the pandemic evolves, the consequential impact on the reinsurance industry too will evolve. One thing is for sure: In order to facilitate the reopening of the economy, we can expect governments, insureds and reinsureds to continue to look to reinsurers to help spread the financial exposure.
By Paul Moura