If America is able to “flatten the curve” of the now-spiking health crisis of the novel Coronavirus or Covid-19, there will be “few if any immediate solvency issues” for the insurance sector, according to Eric Cioppa, the state regulator insurance representative on the Financial Stability Oversight Council.
However, the public face of a promise to pay could weigh more heavily on the industry than pure contract language in this global pandemic, with its catastrophic human costs.
Cioppa is Maine’s insurance superintendent and immediate past president of the National Association of Insurance Commissioners, a group which has stressed that the sectors have significant holdings of cash and securities.
“The life sector, property have significant holdings of cash and marketable securities,” Cioppa said during the open portion of the FSOC meeting March 26. The FSOC is chaired by the Treasury Secretary Steven Mnuchin. Its members are the top oversight officials of each sector of the financial services industry.
Commissioners have assured other financial regulators and the public insurers have holdings of high quality bonds. Cioppa noted that the sector’s their largest asset class is bonds and over 95% of those are in high-quality investment grade securities that are less likely to default during a weakened economy.
Insurers have a much smaller exposure to equity securities, commissioners have stated.
The life, property and casualty sectors all have significant holdings of cash and marketable securities, Cioppa said during the meeting.
At a March 20 special session on Covid-19, Virginia Insurance Commissioner Scott White said that capital losses are bound to occur but those with exposure to the commercial sectors of oil, gas and travel will be the hardest hit.
White spoke as head of the NAIC’s Financial Condition Committee, which is vice-charred by Cioppa. He stressed the industry had plenty of cash — “more than enough to pay claims even under a Spanish flu scenario.” White said he doesn’t think insurers will become stressed enough to sell off assets.
The states and territories are monitoring the effect of the drop in interest rates and the already prolonged low interest are environment, which can stress portfolios even more.
Insurance commissioners have also noted during these open sessions that there are ongoing communications with domiciled companies to evaluate any impact on individual insurers.
At the same time, insurance trade organizations are working together and with the Administration and Congress on addressing liquidity issues around a potential onslaught of claims. One immediate challenge is a growing anxiety about the public perception of the actual scope of insurance coverage compared with what some might see as arcane but legal policy exclusions such as virus outbreaks.
The property casualty community is concerned about solvency issues under potential retroactive coverage of business interruption insurance due to a viral outbreak, which is usually not in commercial policies unless explicitly negotiated with a broker.
Losses for just small businesses with 100 or fewer employees could range from $220-$383 billion per month, according to the American Property Casualty Insurance Association‘s preliminary estimate. The p/c industry’s total surplus is roughly only $800 billion. This includes all U.S. home, auto, and business insurers combined, with business insurers only a fraction of this number, it noted.
Thus, it would take two months to swallow the entire p/c industry surplus under this limited and hypothetical scenario.
“If policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted and that could affect the ability of consumers to address everyday risks that are covered by the property casualty industry,” according to the APCIA’s president David Sampson.
Insurance trade groups have banded together to recommend at the formation of a Federal Business Interruption and Workers’ Protection Recovery Fund to address liquidity needs of businesses.
The fund would be a liquidity facility with an insurance infrastructure, according to someone familiar with the proposal. In a March 21 letter to the President and Congressional leaders, insurance groups suggested the Fund be patterned after the September 11th Victim Compensation Fund, created by Congress.
Meanwhile, the New York and California insurance departments have already begun directing insurers to submit data regarding coverage of commercial business interruption related to COVID-19.