International regulatory organisation warns against retrospectively covering Covid-19 losses

The International Association of Insurance Supervisors (IAIS), an international voluntary membership organisation of insurance supervisors and regulators, last week warned against initiatives that require insurers to retrospectively pay claims relating to Covid-19 - the body said “to cover such claims could create material solvency risks and significantly undermine the ability of insurers to pay other types of claims”.

In a published statement, the IAIS cautioned “against initiatives seeking to require insurers to retroactively cover Covid-19 related losses, such as business interruption, that are specifically excluded in existing insurance contracts.

“In such cases, the costs of claims against losses have not been built into the premiums that policyholders have paid for their insurance. Requiring insurers to cover such claims could create material solvency risks and significantly undermine the ability of insurers to pay other types of claims.

“Such initiatives could ultimately threaten policyholder protection and financial stability, further aggravating the financial and economic impacts of Covid-19.”

This type of action has so far been most commonly seen in the US, where states like New Jersey are legislating for insurers to retrospectively pay for Covid-19-related business interruption losses, whether policy wordings specifically cover these claims or not.

‘Essential service’

The IAIS added that “insurance is an essential service at this time of distress, providing protection against the heightened uncertainties created by the pandemic” and “for insurers to play this role, and to contribute to economic recovery, the stability of the sector is vital”.

To achieve this, the IAIS has been liaising with other standard-setting bodies, as well as the Financial Stability Board (FSB) to assess the impact of Covid-19 on the global insurance sector. The membership organisation has further committed to supporting the FSB’s recently published principles for ensuring international cooperation and coordination of responses to Covid-19 and is facilitating the sharing of information and discussion among its membership on supervisory responses to the impact of Covid-19.

IAIS continued that “where pandemic risks are covered by a policy, it is important that insurers pay out such claims in a prompt and efficient manner”.

It said: “The IAIS discussions of the supervisory responses to Covid-19 have highlighted the importance of effective policyholder protection and fair customer treatment at this difficult time.

“The IAIS welcomes the variety of proactive steps taken by insurance supervisors and insurers in support of policyholders. Such efforts include implementation of alternative, non-face-to-face distribution and servicing arrangements, enabling flexible arrangements for premium payments, premium rebates and discounts on policies with significantly lowered risk exposure and voluntarily enhancing cover [or] reducing premiums for essential workers.

“In circumstances where pandemic risks are covered by a policy, it is important that insurers pay out such claims in a prompt and efficient manner.

“Efficient claims handling and clear communication with policyholders regarding coverage for losses arising from Covid-19 should help deepen confidence and trust in the insurance sector and contribute to longer-term economic recovery efforts.

Coverage limits

The IAIS also flagged the limits of the insurance sector in a global pandemic situation, citing the “pooling and diversification of risks” as a challenge.

It continued: “This widespread pandemic has highlighted the limits on the types of coverage that can reasonably be offered by the insurance sector alone.

“Under such circumstances, the pooling and diversification of risks necessary to support viable insurance cover are difficult to achieve. The IAIS, therefore, encourages efforts seeking potential solutions to protect businesses and individuals against these types of risk, and stands ready to help facilitate these discussions at the international level.”