I’m still trying to understand Megan McArdle’s argument in her latest Washington Post column. Is she really arguing that insurance companies should not be required to pay claims under business interruption policies because they can’t afford to do so?
After all, while the businesses that are currently shuttered didn’t do anything wrong, neither did their insurers. The government has shut them down to protect us all against a deadly virus. Since everyone is getting the benefit, everyone should pay for it: through borrowing now and taxes later.
Think of it as Americans belonging to one of the largest mutual insurers in the world: the United States of America, Ltd. It’s a scandal that small businesses are having some trouble getting their claims addressed. But it would still be a mistake for them to try recover losses from lesser firms. Instead, we should all focus on making sure that our mega-insurer covers all valid claims in the most efficient and timely manner.
However, “everyone” did not collect the premiums—insurance companies did. In some cases they’ve been collecting these premiums for most of the last century.
I read her argument somewhat differently. The companies’ actuaries did not factor in the risk of the state governments shutting down their insured businesses. It was no act of God and the federal government shuttered nothing. The expensive lesson the insurance companies are learning is that they should never have offered business interruption insurance. They are incapable of assessing the risks presented by a globalized economy. You don’t offer insurance on uninsurable risks.
If they had assessed and priced the risks properly, would companies have been able to afford supply chains that extended into China at all?
In my view we definitely should not indemnify these private companies, the insurance companies, against the consequences of their own folly. If that means the end of insurance, so be it. They are not benevolent societies.
They are for-profit businesses and we should not ability their ability to make a profit.
My understanding of the issue is that insurance industry started excluding “Loss Due To Virus Or Bacteria” from business interruption policies about 15 years.
A number states, whose regulators would have necessarily approved the change, are now trying to pass laws to interpret the exclusion as not applying to the present situation. Almost certainly unconstitutional for the same reason states can’t rewrite their pension commitments.
It also sounds like there is coverage for property damage if the property is contaminated, but this might be limited to reimbursing the cost to decontaminate it, or maybe there is liability coverage if the employer is sued for doing or failing to do something.
In my opinion insurers who offered business interruption coverage should have cancelled those policies in January and refunded the premiums. If they didn’t take the issue seriously, why should anyone else?
The social purpose of insurance is to allow companies to price risk. If insurers are unable to do that and unwilling or unable to pay claims, what good is insurance?
I’m pretty sure the insurance industry did price the risks, its probably in their submittals to the state regulators justifying the exclusion. If the cost of coverage of a risk is so high that the consumer won’t pay the premium, then its not an insurable risk.
My very point. I don’t believe that business interruption is an insurable risk, therefore insurance companies shouldn’t be writing policies for it.
Maybe it was 30-40 years ago which IIRC was when there was a move towards including it in business insurance plans but a lot of things have changed since then.
Guys
I don’t think they priced it. Nor should they have.
Three and four sigma risks are excluded for commercial reasons. Its a longstanding principal. To not do so would bring a large diminishment to commerce. C’mon guys. You know better. Don’t let your hatred of insurance companies color your view.
We have force majeure in contracts. As I have pointed out, in the absurd, underwriting asteroid proof roof issues, Sherman tank construction of cars along with 10 mph limits, airplanes so rigorously built they can’t fly………… The absurdities can go on and on.
But that’s what you are advocating.
To cavalierly declare the end of insurance, especially in the context of a real world reinsurance or Lloyds insurance environment, is just academic noodling.
I don’t hate insurance companies. I hate subsidies. As a general principle I don’t think that any business should be subsidized. That includes insurance companies. It includes banks. It includes auto companies. It includes airlines. It includes farmers. And on down the list.