Insuring the Changing Economic Times

by Ben Conrad | April 2, 2020

Business as we know it has been changed as a result of the ongoing coronavirus pandemic. Tried and true supply chains are being subjected to unprecedented disruption. Productivity is being challenged due to the workforce transitioning to working remotely, or being completely disrupted through business shutdowns. Fundamental processes and workflow are being re-evaluated everywhere to try and keep production as normal as possible in an abnormal time.

A hard truth about the situation is that we simply do not know how long it will last or how deep this crisis will cut into our society’s economic structure. This translates to an unknown impact on many businesses. Most companies understand their primary short-term risk, and have been prepared to handle a slight delay in business or a temporary change to the way things are done. But what if that delay isn’t so slight or that change isn’t so temporary? Is there something you can do today to better prepare your business for some of these possibilities? The answer may lie in your company’s insurance package.

So, Other Than Through the Stimulus Package, I Could Recoup All of These Losses I’m Seeing?

Well, not exactly. Remember what it means to be an insurable risk.

  • The loss has to occur because of an unforeseen accidental event. — Check.
  • The loss has to be unexpected in timing and impact. — Check, check.
  • The loss must be statistically predictable. — Check, check, check.
  • The loss must be definite and measurable. — Hmmmm.

The last criteria is a bit more difficult to understand, and is left to the interpretation of actuaries, insurance regulators, and other insurance professionals. As this event continues to unfold, companies are realizing losses of all kinds. The following list shows a few examples of impacts that have occurred as a result of the coronavirus pandemic that could also be considered insurable.

  • Businesses have been forced to suspend in-person operations, eliminating related revenue during that period.
  • Consumer and business spending have dropped off dramatically causing key contracts to be canceled.
  • The supply of manufactured goods necessary for the day-to-day operations of some companies has been reduced or eliminated due to factory closings or redirected production.
  • Businesses are unable to provide normal services to the companies they serve, causing delays or loss of revenue for those companies.

How Do I Prepare for This If It Happens Again?

The impact of the quarantines and shutdowns of businesses is being felt by industries that require person-to-person interaction at some level. Our business world is interwoven such that an impact to just a few industries can trickle down to affect the way many of us do business, and we will be learning how much risk was mitigated thorough existing insurance, and what risks remain that need to be addressed.
So how can you protect yourself? One option is to re-evaluate your insurance program, whether through the traditional market or an alternate market solution such as a captive insurance company. Below is a list of insurance coverage options that can help you protect yourself against sudden economic changes.

Business Interruption Insurance
Covers loss of income related to the interruption or delay in normal business operations caused directly by an unforeseen event. Coverage triggers can vary significantly between policies and industries.

Contingent Business Interruption Insurance
Covers loss of income related to the interruption or delay in a business that your business depends on. This coverage triggers only in the event of physical damage to that business that your business depends on.

Supply Chain Interruption
Covers loss of income related to the interruption or delay in a business that your business depends on. Coverage triggers can extend beyond physical damage and often include a wide variety of unforeseeable events such as labor issues, road closures, regulatory action, or public health emergencies (such as coronavirus).

Loss of Key Customer/Contract/Supplier
Covers loss of income related to the loss of a key customer, contract, or supplier. These customers, contracts, or suppliers are often named in the insurance policy and coverage is only provided due to unforeseeable events. The business decision of a customer, contract, or supplier to end a relationship does not qualify as insurance.

Every insurance policy is slightly different and may provide different levels of coverage. When considering insurance options, it is important to work with your insurance professionals to make sure you are getting the coverage you need to best protect your interests.

Pricing for these types of coverage can be highly specialized to an individual business. Actuarial pricing for these coverages will not simply focus on this one event, but also consider the many years before that have not seen a triggering event. This sort of long-term smoothing of frequency and severity is very important for such catastrophic risks. Because of what is happening right now, actuaries and data scientists can generate models for a similar crisis in the future.

What Actions Can I Take Today?

Coronavirus is impacting our society faster and more severely than any of us thought possible. You should remain vigilant in planning for and protecting ourselves against the unknowns by utilizing the expertise of insurance professionals. While changes to a company’s insurance structure may not be the perfect solution for everyone, it is imperative that every company re-examine their enterprise risk management efforts to ensure they are optimizing opportunities and mitigating risks.

Ben Conrad has more than 12 years of actuarial experience both as a consultant as as an insurance regulator.